Roadshow Preso Aug 2021, page-132

MU is very fond of the term "shareholder value". But at times I have to wonder what their grades were on Finance 101.

ROACE is MU's preferred metric. But do you know what it means?

Return on Capital Employed (ROCE) determines how efficiently a company is when it comes to generating revenue using the capital employed by it (from all sources i.e. shareholders’ equity plus debt obligations (loans and borrowings) and capital used for activities other than revenue generation (e.g. investments)).. ROACE is simply an average of the starting and ending values for the FY. A high ROACE number is good (MU wants >15%) and means it is efficient at generating revenue and profits using that the capital in the business.

ROACE is a profitability ratio from the company’s perspective. It is more useful to company management than to investor as ROACE shows the ability of company management to generating revenue.

As a shareholder I'm far more interested in plain old Return on Equity (ROE) as that looks only at the equity component of the capital structure of the company and also Return on Invested Capital (ROIC). I like the ROIC metric, because it looks at things from an equity investor’s perspective. It helps determine the "potential" returns from the capital we’ve invested.

Preference is to use NOPAT (Net Operating Profit after Tax) taking EBIT * (1- Tax_Rate) at ~sector average. So this is a "hypothetical" number intended to take out any tax advantage from leverage. Invested Capital can have all sorts of adjustments applied ... trying to get to only the capital that is invested and actively used by the company for production (so strip out excess cash, investments for example).

So hopefully you agree that ROAIC is important to us the equity investor. That's important because ROIC is an important piece of the Economic Earnings (EE) formula ... which is inline with my preferred view based on residual income (earnings).

EE = (ROIC – WACC) * Invested Capital ... keep this formula in mind.

OEL's WACC is >15% at present (depends on the stock beta & market premia used).

OEL EE (2020) = (-2.9% - 15%) * $39.8M = -$7.13M (earning a -17.9% return on capital ... would you invest in that?)

Pretty sure when the numbers for FY21 are released that OEL EE(2021) will be even worse (no surprises given GC-21).

Shareholder value is created when EE >0 (i.e. earning a return above the cost of capital on the capital invested in the business).

MU has a lot of work to do. Creating "Shareholder Value" is easy to say but hard to achieve because a business that earns returns that below its cost of capital will destroy shareholder value as it grows. And that's what the market is afraid of IMO..