Author Archives: Edward Brownlee

Return on Invested Capital

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“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here, a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” – Warren Buffett, 2007 Chairman’s Letter for Berkshire Hathaway.

Invested capital is the amount of money that has been invested in a business for purchasing inventory, equipment, property, leases, and funding the difference between accounts receivable (i.e., how much money is owed by customers to the business) versus accounts payable (i.e., how much business owes vendors).

Return on Invested Capital (ROIC) is a financial ratio that shows a company’s ability to allocate capital. The standard formula to calculate ROIC is to divide a company’s after-tax net operating profit by the sum of its debt and equity capital.

Once the ROIC is calculated, it is evaluated against a company’s weighted average cost of capital, commonly referred to as WACC. If a company’s WACC is not immediately available, it can be calculated by taking a weighted average of the cost of a company’s debt and equity.

The cost of debt is calculated by averaging the yield to maturity for a company’s outstanding debt. This is easy to find, as publicly traded companies must report debt obligations.

The cost of equity is typically calculated using the capital asset pricing model, or CAPM.

Once the WACC is calculated, it can be compared with the ROIC. Investors want to see a company’s ROIC exceed its WACC. This indicates the underlying business successfully invests capital to generate a profitable return. In this way, the company is creating economic value.

References:

  1. https://www.suredividend.com/high-roic-stocks/
  2. https://www.stratechi.com/fcf-and-roic/

25 Things About Life I Wish I Knew

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Life is all about relationships, health & wellness, purpose, being grateful and mindful, and learning:

  • Relationship refers to the state of being related or interrelated to others. It refers to the connection or bond between two or more people.
  • Health is the state of complete physical, mental, and social well-being, while wellness is the active process of achieving it. Wellness has six dimensions: physical, intellectual, emotional, environmental, social, and spiritual.
  • Purpose refers to having a definite vision and goal and being determined to achieve it. It is your “why” for life.
  • Being grateful is a positive emotion that entails focusing your time and attention on what you appreciate. The intent is not to block out difficulties but to approach those difficulties from a different perspective.
  • Being mindful is a state of active, open attention to the present moment. It involves observing one’s thoughts and feelings without judging them as good or bad.
  • Learning is acquiring new knowledge, skills, and behaviors through experience, observation, and reading. It is a relatively lasting change in perspective and behavior resulting from experience, observation, and reading.

Reference:

  1. Psyche Wizard

Artificial Intelligence: Microsoft Copilot

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Microsoft Copilot is an AI-powered productivity tool that integrates with various Microsoft 365 apps. It uses natural language to interact with these apps, the Microsoft Graph, and a Large Language Model (LLM).

Here are some key points about Copilot:

  1. Functionality: Copilot can understand and generate text based on your content and context. It performs actions within the apps, making tasks more efficient and streamlined.
  2. How It Works: Copilot processes your prompts and responses, leveraging grounding, processing, and post-processing techniques. It interacts with organizational data to provide relevant answers.
  3. Use Cases:
    • Drafting Documents: Copilot assists in creating documents, emails, and presentations.
    • Summarizing Emails: It can summarize lengthy emails.
    • Chatting: Copilot can engage in natural conversations.
    • Business Insights: It provides insights based on Microsoft Graph data.
  4. Privacy and Security: Copilot respects your privacy and security. It does not retain or train on your data.

References:

  1. https://copilot.microsoft.com/

Free Cash Flow Yield

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Key variable: free cash flow yield.

Free cash flow (FCF) is one of the most important financial metrics you can study – especially if you’re a buy-and-hold investor. Free cash flow is the amount of money generated from a company’s operations minus any capital expenditures; it is the cash remaining after a company has paid its expenses, interest on debt, taxes, and long-term investments to grow its business.

Suppose a company generates more cash than it needs to run its business. In that case, it can do several valuable things, such as pay dividends, buy back its stock, acquire other companies, expand its business, and knock out its debts.

Free cash flow yield is thus free cash flow per share divided by the stock’s price.

By looking at operating earnings, free cash flow takes out one-time gains or losses that may obscure the actual state of a company’s business. It’s also less susceptible to the accounting gimmicks impacting a company’s reported earnings.

Many of the greatest investors consider free cash flow yield a key factor in analyzing a stock. There are limitations to any single metric, and free cash flow per share and free cash flow yield are no exceptions to that rule.

A company, for example, can have an extremely high free cash flow in part because it is putting off necessary capital expenditures. Similarly, a good company that makes significant capital investments one year may see its free cash flow take a hit but may benefit over the longer haul. That’s why it’s important to consider free cash flow along with a stock’s other fundamentals.

References:

  1. https://www.forbes.com/sites/investor/2013/08/08/four-free-cash-flow-yield-all-stars/
  2. https://www.kiplinger.com/slideshow/investing/t052-s001-10-stocks-to-buy-for-kingly-free-cash-flow/index.html

Citi AAdvantage Executive World Credit Card

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Frequent American Airlines flyers have one big reason to consider the Citi AAdvantage Executive World credit card with its $595-a-year fee: It comes with access to the carrier’s exclusive airport lounges, wrote Gregory Karp and Craig Joseph.

The advantages of the card include:

Pros

  • Admirals Club® membership for you and access for up to two guests or immediate family members traveling with you.
  • No Foreign Transaction Fees on purchases.
  • Earn 1 Loyalty Point for every 1 eligible AAdvantage® mile earned from purchases.
  • First checked bag is free on domestic American Airlines itineraries for you and up to 8 companions traveling with you on the same reservation.
  • $100 credit on Global Entry or TSA PreCheck every four years.
  • 25% discount on in-flight food and beverages on AA flights.
  • Priority boarding, check-in and screening on AA flights.
  • Luxury perks

One of the easiest ways to get an Admirals Club membership is to get the Citi AAdvantage Executive World Elite MasterCard. The credit card includes access to nearly 100 Admirals Club® and partner lounges worldwide. Immediate family (spouse, domestic partner and/or children under 18) or up to 2 guests may join you. Up to $850 value.

This card has some great perks that would interest anybody looking to frequently fly with American Airlines, such as: 2X on purchases on American Airlines, free baggage, and priority boarding privileges.

Priority check-in offers you a special counter area for you to check in at many airports. These check-in areas (seen below) can have much smaller crowds than the standard check-in areas so you can save a lot of time.

Priority boarding privileges

The priority boarding benefit will display on your American Airlines boarding pass as “Group 4.”

This is the final group in the priority boarding group, so you’ll be boarding before all the economy passengers but you’ll still have some first class and elites in boarding in front of you.

Additionally, American Airlines implemented a fully dynamic award chart, where the number of miles required for a free flight changes based on demand.

For low-demand periods, you can reportedly find flights within the lower 48 states for as low as 7,500 miles each way.

The bottom line is if access to Admirals Club airport lounges is a high priority for you, then this is your card.

References:

  1. https://www.nerdwallet.com/reviews/credit-cards/citi-aadvantage-executive

TRICARE Fit with Medicare

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At age 65, TRICARE health care plans morph into the TRICARE For Life Medicare supplement plan, also known as TFL. For TFL to function, you must have Medicare Parts A and B. Health care providers bill Medicare as the primary payer and TRICARE as the secondary payer.

If you’re entitled to premium-free Medicare Part A, you must also have Medicare Part B to keep TRICARE, regardless of your age or place of residence (exceptions to this rule are discussed in the Delaying Medicare Part B Enrollment section).

Once you have both Medicare Part A and Part B, you automatically receive TRICARE benefts under TRICARE For Life (TFL). TFL is the health plan for TRICARE benefciaries who have Medicare Part A and Part B. Medicare Part C (Medicare Advantage plans) and Part D (prescription drug coverage) aren’t required for you to have TFL coverage.

Regardless of your age or the age of your spouse, you will not lose TRICARE medical coverage if you do not signup for Medicare. Simply enroll in Medicare and TRICARE For Life. Your window to apply starts three months before the month you turn 65. It lasts seven months.

But don’t wait. Two or three months before your birthday, visit Medicare.gov and enroll. Early enrollment ensures you receive your Medicare card in the mail. Your TFL coverage begins the first day you have both Medicare Parts A and B; there is no separate enrollment paperwork for TRICARE For Life.

Medicare Part A has no premium. Part B has a monthly premium based on your income level. The Part B premium is per person, per month. Medicare uses the last reported tax filing, two years ago, from the IRS to determine your income level. Search “Part B Cost” at Medicare.gov to find your current cost.

If you travel overseas, your TFL converts to TRICARE Select Overseas. You’ll be covered at TRICARE Select rates. You will pay for services overseas out of your own pocket and be reimbursed by TRICARE after you file a claim.

Understanding all the nuances of health care can be tricky. MOAA has subject-matter experts on hand to assist Premium and Life Members. Call  (800) 234-6622 or email msc@moaa.org and we can properly direct you to assistance.

References:

  1. https://www.moaa.org/content/publications-and-media/news-articles/2020-news-articles/you-ask,-moaa-answers-tricare-at-65-and-over/
  2. https://www.tricare.mil/-/media/Files/TRICARE/Publications/BrochuresFlyers/TRICARE_Medicare_Turning_Age_65_Brochure_Feb2023_022123_FINAL_508.pdf