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fbeckner,

Looks like you have the tax rate, revenue, and total assets correct, but your EBIT figure is off. You took revenue and subtracted operating expenses. When you did this you missed subtracting cost of goods sold (\$665,805), so your numerator is too large.

For GES, cost of goods sold would be the cost to make and ship all of the clothes. Operating expenses are expenses more like advertising, head office expenses, executive salaries, and other expenses not tied directly to production of the product. When you subtracted just operating expenses you basically created a company that could produce and ship its products for free and just needed to pay advertising, etc. expenses. Pretty cool if you could swing it! :)

What I would recommend is to start with operating revenue (already has cost of goods sold and operating espenses subtracted out) and multiply that by the tax rate, so you'd get this for the numerator:

(in thousands)
GES's operating revenue: \$195,997 * ( 1 - 0.37) = \$123,478

Your denominator looks pretty good. I get \$836,925 for total assets just like you. For non-interest-bearing liabilities I get \$249,539, adding together accounts payable and accrued expenses, which is pretty close to what you got. So that gives me this for the denominator:

\$836,925 - \$249,539 = \$587,386.

Dividing, I get:
\$123,478/\$587,386 = 21% ROIC

So we're much closer now. A few recommendations:

1. Everyone will calculate this a bit differently. For example, some services may calculate the denominator as average assets instead of the assets at the end of the year, averaging the current year end assets with the previous year end assets. So unless the service lays out exactly how they calculate their figures, trying to get within 1% or so of their number will be tricky and probably not too useful. If you are off by 5% or more it is definitely worth checking to see what you (likely) did wrong.

2. Play around a bit with the numbers. We used a tax rate of 37%, which was their tax rate in 2006. But their 2008 tax rate was almost 40%. Just plugging 40% into the above calculations lowers ROIC by 1% to 20%.

3. If you are just starting out, calculate ROIC (and margins) for some of the best, worst, and average companies in the world. Right now, a ROIC of 21% may not have much meaning to you since it's just a number. Calculate ROIC for Coke and Microsoft, some of the highest ROIC businesses out there. Calculate ROIC for GM (one of the lowest). Start getting a feeling for what the upper and lowers ends of ROIC would be. That way, if you calculate ROIC for a company and it's twice as good as Microsoft's, you'll have an immediate idea that you probably did something wrong.

4. ROIC typically sits somewhere between ROA and ROE, so this is another good way to check your figures. ROIC is typically less then ROA since you are removing NIBL's from the denominator. ROIC is typically larger than ROE since, even though you have subtracted NIBL's, the remaining assets are typically still larger than just the equity portion of the company.

Mike

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