We also consider a variety of scenarios. Empirically, free cash flow yield is the most useful metric. If a company is earning above its cost of capital, free cash flow yield plus growth is a good rough proxy for expected annual return. Rotonti: For companies with consistently high return on invested capital (ROIC), do you think it’s useful to incorporate enterprise value/invested capital as a valuation metric? I have sometimes found that companies that have high ROIC and are trading at lower multiples of invested capital tend to also look attractive using other valuation methodologies. Miller:If a company can consistently earn high ROICs and you can buy that company close to the amount that’s been invested in the business, that is usually a bargain, especially if the company can grow. Rotonti: Would you rather invest in a company that is reinvesting most or all of its earnings into growth or in one that can both grow and return cash to shareholders through dividends and buybacks? click this link nowMiller:We prefer to see companies make these capital-allocation decisions with an objective of maximizing the present value of free cash flows. If a company can invest in its business and earn returns in excess of the cost of capital, it should usually do that. If a company returns cash to shareholders in the form of dividends, that capital earns the market return. If a company buys back stock, the return depends on whether the stock is under-, over- or fairly valued.
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