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So, the question in my mind is whether they are creating or destroying value.

Hi Oforfive,

Bottom Line: They appear to be creating value.

I'll get to the calculations in a minute, but first wanted to explain how I use this information. Number one, it's directional -- I'm not trying to calculate precise values. Number two, you'll find there are many ways to do the calculations, some of them much more detailed; I use a simple method because again I'm just trying to just get an approximation. Number three, the results are meaningless (or even misleading) taken in isolation; for example, a business can appear to be destroying value when in fact it is just in the stage of development where investments have been made but are just starting to bear fruit. And vice-versa -- it can appear to be creating value when in fact it's headed for the outhouse. In other words, this is just one tool that needs to be combined with many other tools to help develop a full picture of the business.

Okay, with those caveats, here are the calculations for ATRO for the last four years:

2010 2011 2012 2013 2014

Short-Term Debt 5,314 5,290 9,268 12,279 2,796
Long-Term Debt 33,264 27,973 20,715 188,041 180,212
Shareholders Equity 77,215 105,144 125,134 171,509 228,177
Debt + Equity 115,793 138,407 155,117 371,829 411,185
Average Debt + Equity 127,100 146,762 263,473 391,507

Operating Income (ex one-time items) 33,321 32,625 42,305 87,362
Tax (35% Statuatory Rate) 11,662 11,419 14,807 30,577
Net Operating Profit After Tax 21,659 21,206 27,498 56,785
Return on Invested Capital 17.0% 14.4% 10.4% 14.5%

Cash from Operations 27,908 24,178 49,549 99,874
Capex -14,281 -16,720 -6,868 -40,882
Capital Lease Obligations -35 -12 -3,819 -14,906
Free Cash Flow 13,592 7,446 38,862 44,086
Cash Return on Invested Capital 10.7% 5.1% 14.7% 11.3%

Cost of Capital (97 Firms, US and ex US) 8.0%

What we are doing here is looking at return on investment, much like you'd look at your own return on investment of your portfolio, and comparing it to the cost of that investment. Here I'm looking at two types of return: (a) return using earnings and (b) return using free cash flow.

The first step is to combine short-term debt, long-term debt, and shareholders equity, and then take an average for this year and last year so as to get an approximation for the capital used during the year.

For (a)...

Take operating income minus any one-time items and use the statutory tax rate (found in the 10-K) to get net operating income after tax (called NOPAT). The idea here is to see earnings before the cost of financing. Then divide NOPAT by the average debt + equity to get return on invested capital.

For (b)...

Take cash from operations and subtract Capex and Capital Leases (if any) to get Free Cash Flow, then divide this by the average debt + equity to get cash return on invested capital.

Now that you have a and b you can compare them to the cost of capital for ATRO. You can calculate this yourself but it's not fun so I cheat and use the industry cost of capital that I get from Damodaran. It will change depending on interest rates and other things so I've only shown the value for 2014.

Again, I'm not trying to be precise, just trying to get an approximation, and then have to put it into context with all the other information about the business.

Clear as mud? Please ask if any of this is confusing. There is a lot to this that I haven't gone into just to keep it simple for now and to get something out there for you to look at.

Thanks,
Ears