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The reinvestment rate is significant in investment valuation as it represents the rate of return that can be earned on the cash flows generated by the investment. It is used to calculate the future value of cash flows and thus impacts the overall valuation of the investment. A higher reinvestment rate will result in a higher valuation and vice versa.
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Do you need to weigh up several investment projects or public companies to invest in? This spreadsheet compares the efficiency of capital use between companies based on assumptions of Return on Invested Capital (ROIC), reinvestment rate and valuation multiples. Then, net income and equity value forecasts are derived and returns are compared over the long term by the company. The sensitivity of returns to the core assumptions is also provided.
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Need help with which companies or projects to invest in? As a key driver of value in business, ROIC measures how well the company deploys its capital....
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