Now let’s revisit the paper manufacturing company that we have already analyzed before. Here we will take a look at the detailed financials of the company and do a pro-bono consulting work for its management. Our primary goal is to provide a few suggestions to the management team on future improvements, but not only that, we also want to provide support to creditors and shareholders and help them evaluate their investments into the company.

Background

If you recall, the year we did the analysis was 2002. In this episode, we want to discuss the situation two years later, or 2004. By 2004, this company had been operational in its industry for more than 10 years. When this company initially entered the industry, it upgraded some products by acquiring advanced technologies. This way, it obtained a foothold in the industry relatively quickly. 

The company subsequently decided to focus on the following tactics. First, it seeks rapid expansion via mergers and acquisitions. Through agressive M&A activities and direct investments, the company quickly became the largest company in terms of production capacity in the industry. Second, the company also decided to actively explore international markets in addition to the domestic markets that it’s already in. Last but not least, the company also developed a wide range of products. 

Our target company, throught its business decisions and executions, became the largest paper manufacturing company in the industry. To gain a fair understanding of the company’s performance, it’s only logical to compare it with the second largest company instead of the industry average. The comparison company actually has some huge differences from this company. The most noticeable difference is that this company has a homogeneous product line with relatively few selections. Later, we will show how the product lines of these two companies are constituted. 

In addition, the target company invests in various aspects of the industry such as raw materials. In previous discussions of the paper manufacturing industry, we mentioned that the supply of raw materials in China is relatively short because of limited forestry resources in the country, and many raw materials such as wood pulp and waste paper pulp need to be imported. 

The company actively explores various sources of raw materials. On one hand, it built many raw material production bases, including a 30,000-ton reed pulp base, a 50,000-ton wood pulp base, and a 50,000-ton poplar wood pulp base. On the other hand, it also cultivated a 666.7 square kilometers poplar forestry. In other words, the company actively attempts to solve the raw materials shortage problem by planting trees and boosting its pulp production capacities. Later it also took over another company with an annual production capacity of 300,000 tons of pulp.

In summary, the target company engaged in numerous business activities in the past few years, activities such as large-scale expansions, mergers and acquisitions, product line expansions, and vertical integration, i.e. building production bases of raw materials. Although the company is rapidly expanding its scale in the market and constructing its production bases, the company’s financial data is not very optimistic. Let’s take a look.

We already know that the primary benchmark to evaluate a company is its ROI, specifically, the return on total assets. The target company only has a 3% ROA, a number even lower than bank’s deposit interests. Therefore, without making further calculations, we know that the company’s return on investment is below its cost of capital. 

The company that we compare our target company with has a 7% return on total asset, even though this company is only regional. Clearly, the target company lags behind significantly in terms of return on investment.

Why, exactly, is its return on investment so far behind that of its competitor? 

Cost Analysis

Although the company is quickly developing in the market, its financial data are not optimistic. The company’s return on investment is only 3%, which is far behind the 7% return enjoyed by its opponent. What is the reason for this situation? We know that return on investment is determined by two factors. One is the company’s effectiveness and the other is the company’s efficiency. 

First, we will examine effectiveness. The net profit ratio of our target company is 7%, whereas that of its competitor is 10%. It is clear that our company’s effectiveness lags behind that of its competitor.

Next, we will examine efficiency. The company’s total asset turnover ratio is 0.45, whereas its competitor’s is 0.7. It is clear that from the perspective of efficiency, this company also lags behind the competitor. From our previous lessons, we know that a company will normally make trade-offs between effectiveness and efficiency when setting its overall strategy. However, for this company, what we see is that both effectiveness and efficiency lag behind. A lagging effectiveness plus a lagging efficiency has caused a less satisfying return on total assets for the target company. Therefore, the next step is to find out why this has happened.

Let us first look at the effectiveness. We know that the most important factors that determine a company’s net profit ratio are costs and expenses. This is the company’s cost and three of its expenses in 2004. Specifically, we want to examine the proportions of operating expense, management expense, and financial expense relative to its revenue. 

First of all, we will examine cost. We find that from the perspective of costs, there is no difference between the company and its competitor; the costs of our target company and those of its competitor are both 76%. This figure seems to indicate that the problem of the company’s poor effectiveness is due to higher expenses rather than costs. However, this may not be the case.

If you recall, the paper manufacturing industry is highly capital intensive and requires a great deal of fixed asset investments. Theses fixed asset investments mainly involve equipment, meaning that the company’s production costs contain relatively more fixed costs. When a company’s production cost contains costs that are relatively more fixed, economy of scale exists. An industry with economy of scale will see a decreasing unit cost of fixed assets with the increase of production. The more products are produced, the lower the unit cost of fixed assets.

Now let’s examine the production capacity of these two companies.

We can see that production capacity is approximately 1.5 million tons for the target company and approximately half a million tons for the competitor. That is, the production capacity of the company is approximately three times that of its competitor. Knowing this, it is nature to assume that the target company will have economy of scale over its competitor simply because of its size. Our target company SHOULD have a cost advantage.

However, for a company with production capacity three times that of its competitor, we actually don’t see the expected cost advantage, which is reflected in the equal percentages of cost over revenue for both companies. 

So, what could be the problem? 

Let’s further examine the product lines of these two companies. From the table above, we can clearly see that the target company’s product line is much more diverse than its competitor’s. Its products include writing and printing paper, newsprint paper, and cardboard paper. With respect to the writing and printing paper, the company also makes different products, including light-weight coated paper, offset paper, writing paper and art paper. Its competitor only produces two types of paper: newsprint and cultural paper. In addition to the company’s diverse product lines, the size of each product line is actually not very large. Among the various products, we see that only art paper is relatively large with a similar size of the competitor’s newsprint product line. 

The paper manufacturing industry has an important feature: each line of product needs a specific set of equipment, which can only produce this specific type of product. Logically, the economy of scale cannot be achieved by a bigger company size, and can only be achieved by a bigger product volume for that specific type of product. 

By now we should be able to understand why the company failed to achieve a lower cost structure despite of its size. Even though the company’s production capacity is three times as large as its competitor, it actually achieved such capacity via product line expansion, and no single product’s volume is significant enough to achieve true economy of scale. This is the reason why the target company does not have a cost advantage over its competitor in this capital-intensive industry.

This table lists the cost structure for producing one ton of paper in different regions of the world. In China, the cost structure of paper manufacturing is relatively special. China has a distinct advantage in labor cost, and a disadvantage in the cost of raw materials. For a paper manufacturing company, this means that in addition to fixed costs, costs of raw materials also make a material impact to its cost structure. 

Our target company has been building raw material production bases and cultivating forestry for some time. It not only has built and acquired production bases, but has also planted trees on a very large scale. The company has done quite a lot of work to combat the shortage of raw materials. The company should have exhibited a clear cost advantage after all the work.

Yet from our discussions above, we know this is not the case. The reason is actually quite simple; although the company actively builds raw material bases, trees will take considerable amounts of time to grow to maturity, after which trees will have to be harvested and processed into pulp. It will likely take quite some more time before all the vertical integration efforts can be reflected in the company’s costs.

On the other hand, how does the competitor perform? This competitor has two primary products, newsprint paper and cultural paper. Newsprint paper is usually not produced from wood pulp but from reed, and there are abundant reed resources in the local region. The competitor has been able to utilize such local resources to maintain a reasonable raw material cost.

In summary, our target company has engaged in a great deal of vertical integration; it vigorously plants trees, develops pulp bases and acquires production capacity. Its competitor, on the other hand, solves the problem of insufficient raw materials by using alternative raw materials. They also differ in their product line strategies. Our target company has a multi-line strategy, further diluting its chance to achieve economy of scale, while the competitor has a much narrower selection of products.

Expense Analysis

Let’s revisit this table illustrating all the costs and expenses. In this table, we also list the proportion of each expense relative to revenues. Clearly percentage wise, all three expenses of the the target company are higher than those of its competitor. 

Let’s start with financial expenses. 

Financial Expenses

Clearly the target company has more debt financing than it competitor does. This company has taken out both short and long term loans, and has also issued bonds. Overall, all of the company’s interest-bearing liabilities account for 44% of its total assets, whereas the same categories of liabilities only acount for 19% for the competitor. Because the company has more interest-bearing liabilities, its financial expense is significantly higher than that of the competitor. 

Here we see that to support a production capacity approximately three times as large as that of the competitor, the company needs to invest more in this capital-intensive industry, where a production capacity of approximately 10,000 tons requires an investment of 100 million CNY. Considering that the target company has 1 million ton more capacity than the competitor, it likely has invested 10 billion CNY more than the latter. Such a huge amount of investment is likely the reason why the target company has to resort to debt financing more than the competitor does.

Operating Expenses

Operating expenses include expenses related to sales activities such as advertising, salary of sales team, commissions and bonuses, as well as freight and storage fees incurred during the sales process. 

As part of its expansion strategy, the target company established many sales subsidiaries located across the country, covering most of its major markets. 

From this table, we can see that over 38% of the company’s sales are from eastern China, followed by northern China. The markets in these two areas account for 60% of the company’s total revenue. The raw material bases, on the other hand, are primarily concentrated in northeast China and Inner Mongolia, creating a major mismatch between its own supply and demand. So even though the target company established a great deal of production capacity, such capacity are NOT located in the company’s major markets. The company has to spend a great deal of resources to transport raw materials to production bases, and from production bases to major markets. As a matter of fact, transportation accounts for 75% of all operating expenses, or about 4% of the company’s revenue. 

Management Expenses

Management expenses, or administrative expenses, account for about 5% of revenue, higher than the 3% of its competitor. 

The reason is that in the past several years, the company engaged in many mergers and acquisitions, gradually becoming the largest integrator in the industry. When a company acquires another company, it not only acquires its physical assets, but it also takes in that company’s personnel. The success of any M&A depends largely on whether the personnel of the acquired company can successfully integrate with the buyer. Even for many well-known companies, such integration could be extremely challenging, which can cause the failure of an otherwise successful M&A deal.

This could be a major reason why the target company has a higher administrative expense. Before the company can achieve actual integration after the M&A deal, the company might have a higher administrative expense than its competitor. 

Turnover Analysis

Analyses of cost and expenses are from the aspects of effectiveness. Now let’s move on to efficiency. 

It is apparent that the company also lags behind its competitor on efficiency; its total asset turnover ratio is only 0.45, while that of its competitor is 0.7. To know why the company’s total asset turnover ratio is lower than that of its competitor, first we must understand what are the company’s largest assets, and what the turnover ratio of those assets are like.

First, we want to know what the company’s largest assets are. A simple way to do this is to conduct a common-size analysis on the balance sheet. 

Through common size analysis, we will be able to know a company’s asset structure, which leads us to the company’s largest assets. Upon locating these assets, we then identify those that contribute the most to a company’s low asset turnover ratio. The reason is that the total asset turnover ratio is actually determined by the weighted average of turnover ratio of each asset item, where the weight is the proportion of an asset item relative to the total asset. Therefore, our first step is to identify the structure of a company’s assets.

In this common-size analysis, we can easily see that fixed assets are the company’s largest, accounting for 65% of the company’s total assets. Its competitor also exhibits this type of feature, where its fixed assets account for 70% of the competitor’s total assets. Both companies have exhibited the capital intensity of the paper manufacturing industry. Other than fixed assets, both companies have similar levels of accounts receivable and inventory. These three assets alone, for both our target company and its competitor, account for more than 80% of total assets. In other words, if we can understand the differences between the turnover ratios of these three assets between the two companies, we should be able to find out why our target company has a lower total asset turnover ratio.

Fixed Asset Turnover Ratio

Fixed assets are further divided into two parts, finished fixed assets and construction in progress. Even though our target company has a lower level of fixed assets than that of its competitor, it actually has more construction in progress. 28% of the 65% of fixed assets are actually construction in progress, while its competitor only has 14% out of the 70%. 

Why does this matter? Well, we know that fixed assets under construction can not be put to use. Therefore, it is impossible for them to generate revenue for the company. However, they still need to be accounted for in fixed assets; so construction in progress are essentially fixed assets with ZERO turnover, since they generate ZERO revenue. This is a major reason why the target company’s turnover lags behind.

Inventory

Next let’s look at inventory of both companies.

We find that the company’s inventory turnover ratio also lags behind its competitor. Why is that? Let us look at the types of inventory involved. 

On this table, we see that inventory can be divided into two categories, raw material and finished goods. The largest portion of inventory for the target company is not finished goods, but raw material.Furthermore, relative to the previous year, there was a substantial growth in raw materials within just one year, increasing by more than 400 million CNY. Clearly, our target company was hoarding raw materials.

Why was it hoarding raw materials? Well because of the shortage of raw materials, prices of raw materials are almost always rising. The company could be hoarding just to prevent price fluctuations. But since raw materials cannot generate revenue before they are further processed, they will drag down the overall inventory turnover ratio. 

Accounts Receivable

The target company’s accounts receivable ratio is actually not bad, even though it is still lower than that of the competitor. There could be some factors such as that the company might have adopted loose credit sales policies in order to move products faster. Another reason might be because the company has a wider variety of products.

However, will its more accounts receivable, coupled with a relatively lower accounts receivable turnover ratio, bring higher risk to the company? Let us look at the company’s account receivables. 

For the year 2004, 85% of the company’s accounts receivable were likely within a year old. From this perspective, we believe that the company’s accounts receivable are relatively safe.

This is our analysis of the company’s turnover ratio. There are mainly two reasons why the company lags behind its competitor in efficiency: 

1. The company has more projects under construction, and is at a stage of rapid expansion.
2. The company is taking measures to reserve raw materials, which will result in a relatively low inventory turnover ratio. 

Recap of the Target Company’s Current Status

Reasons the Target Company Lags on Effectiveness

Our target company lags behind its competitor on both effectiveness and efficiency, even though it is much larger in terms of production capacity. 

We find that the company lags behind the competitor on effectiveness for the following reasons: 

1. As a large-scale paper manufacturer, the company does not enjoy the cost advantage that should be present in an industry with economies of scale. This is primarily because this company adopts a multi-product strategy, none of which has a significant scale. 
2. Over the past several years, this company has started building production bases of raw materials, including planting trees and acquiring pulp production capacities. Planting trees, a slow process by itself, will not yield an effect on the company’s costs within a short period of time.
3. The company’s relatively large scale results in a very high financing requirement in this capital-intensive industry, causing high financial expenses.
4. The company’s raw materials, production bases, and major markets are not located in the same region, forcing it to pay high transportation fees, which is a type of operational expenses. 
5. The company’s rapid mergers and acquisitions during the past several years also pose great challenges to company management, and whether the company can effectively integrate its acquired companies is still unknown, potentially causing higher administrative expenses for the comapny. 

Reasons the Target Company Lags on Efficiency

Unfortunately, the target company also lags behind it competitor on efficiency, for the following reasons:

1. The target company have many fixed assets under construction and these projects do not generate revenue, lowering the fixed asset turnover ratio. 
2. The target company has been engaging in hoarding raw materials, more than doubling the total inventory within a year. However, raw materials cannot generate revenue while they are only stored in warehouses, thus lowering the inventory turnover ratio.

Judgment for the Company’s Future

What do you think of the target company’s future after knowing everything? 

To help you with the judgment, let’s first examine the market environment. We know that China’s paper manufacturing industry was growing fast up until 2008, after which the industry transitioned into a stage of excess capacity. The year of 2004 was only four years away from 2008, meaning that companies in the paper manufacturing industry had four years to prepare for such a highly competitive environment.

Another dynamics that was always present was the shortage of raw materials, and companies would have to rely on imports. Consequently, the price of raw materials was always rising. 

Other than exisitng competitions from the industry, companies in the industry also face the threat of substitute products.

Do paper products have potential replacements? Well, it depends on the exact type of paper we are discussing. For example, household and packaging paper are unlikely to be replaced. Even though we can use non-paper wrappers as replacements for packaging paper, the general trend of packaging paper consumptions is still moving up with the level of economic development.

Newsprint paper and writing and printing paper are facing quite different situations. Over the past two years, paperless reading on devices such as iPad, Amazon Kindle, and smart phone has become increasingly popular. The popularity of these items has caused a large reduction in paper-based media. In particular, newspapers and magazines are impacted the most. 

Knowing the general market trend and environment, we might see things differently for the company’s multi-product strategy. Even though the target company wasn’t able to achieve economy of scale as a result of its multi-product strategy, it might be in a better position to deal with changes in the market. For example, the possibility of demands of all of its products going down at the same time is fairly rare. In contrast, the main products of its competitor, newsprint and cultural paper, are most seriously impacted by paperless reading, rendering it less prepared to face future market changes.

In addition, even though the target company’s vertical integration activities have not yielded cost advantages for the time being, the raw material bases and self-planted forestry will msot likely play a role in the future. The competitor, though not worrying about the high fixed costs at this moment by adopting the alternative approach of using reed pulp, will not be worry-free. Since paper manufacturing from reed pulp pollutes heavily, a more strict environment protection requirement could render such method cost-prohibitive. 

A company’s lack of cost advantage may not be fatal when competition is not fierce. For example, when the average gross profit ratio is 30%, a 5% higher than average cost will cause reduce a company’s gross profit ratio to 25%, which is not life or death. However, when the overall industry competition becomes more and more fierce to the point where the industry’s average gross profit ratio is 15% or lower, a 5% difference could make a huge differece. As the industry becomes more and more competitive, we can expect cost to play an ever increasingly more important role in industry dynamics.

Our target company has not only built raw material production bases but has also reserved raw materials, so it’s ready to face the fluctuation of raw material prices. However, the size of its production capacity naturally requires the company to always be prepared to raise more capital. Additionally, the company’s production, supply, and markets do not match, so it urgently needs to correct such mismatches. And it will need more time to digest the extra administrative expenses caused by its merger and acquisition activities. 

The low turnover ratio of fixed assets is primarily because the company is now at the expansion and construction stage and has many projects in progress, which cannot generate revenue until they are finished. As these projects in progress are gradually completed, the turnover ratio of fixed assets will return to a normal level.

The company’s inventory turnover ratio is relatively low due to its hoarding of raw materials. However, hoarding of raw materials might provide the necessary cost effectiveness in the future. So from the perspective of future development, this company is not in a bad situation. 

On the surface we might be inclined to conclude that the target company is in trouble in the year of 2004; but after our in-depth analysis, we have found that there are still many things to anticipate for the target company. Its many past measures have laid a good foundation for its future, although its management still faces many challenges. 

Let’s look at the financial data of the two companies in 2008.

Recall that 2008 was the year for the Chinese paper manufacturing industry to enter excess capacity; competition began to emerge. Clearly, we see that after four years, all of the target company’s the financial indices have significantly improved. This result is consistent with our previous analysis. In addition, we have just mentioned that the competitor might have a problem that its primary product, newsprint, could suffer from the ever more popular trend of paperless reading. Moreover, since the competitor does not have considerable reserves of raw materials, its costs are more susceptible to increase.

Three years after 2008, or 2011, the fierce competition has rendered the competitive environment totally different for the two companies. The competitor’s net profit ratio in 2011 dropped to only 0.7%, at the brink of loss. 

The target company has a gross profit ratio of 16%, 4% higher than that of its competitor. In a highly competitive industry like paper manufacturing, 4% could make a huge difference on the life or death of a company. It is also because of this difference, the target company still turned in a relatively good performance. The subsequent development of the company is consistent with some of our previous judgments.

Just now we discussed what is making money. In the short term, making money means having positive economic profit. In the long term, it means creating value for shareholders.

The amount of value created for shareholders is determined by the difference between the return of invested capital and cost of capital. If we want to make improvements in our company, we should, on the one hand, increase return on invested capital, and on the other hand, think of ways to lower cost of capital. Normally cost of capital is related to the industry and the capital structure, so we won’t put too much energy on this topic. Instead, let’s examine return on investment, or ROI.

Although return on invested capital is a more accurate indicator to return on investment, it actually has the same economic meaning as return on total asset. To simplify the issue, we will still use return on total asset for the following discussions. 

You may remember that return on total asset is determined by two factors, effectiveness and efficiency. Effectiveness is represented by net profit ratio. Efficiency is represented by total asset turnover. And Return on Total Asset is the product of effectiveness and efficiency, or net profit ratio and total asset turnover. 

Whether a company chooses to prioritize effectiveness or efficiency is a matter of strategic choice. There are two types of strategic choices: one prioritizes effectiveness over efficiency, called differentiation strategy, and the other vice versa, called cost leadership strategy. A company would normally make a strategic choice voluntarily by taking into considerations of the trade-offs. Of course, once a strategy is chosen, there is also the matter of strategy implementations.

Some investors may argue that they should only care about return on equity (ROE) and not return on total assets (ROA), for the reason that shareholders should only care about their part of the returns on capital. Why should they care about the return on capital for creditors?

To solve this issue we will need to understand the relations between ROA and ROE. 

ROE is net profit divided by shareholders’ equitites. 

Let’s assume that I don’t know the value of shareholders’ equities, but I do know that of total asset. Obviously I cannot get ROE, but I can get ROA. If I want to get ROE, I have to multiply ROA by another ratio, called total asset divided by shareholders’ equities. In this way, the two total assets will be crossed out, leaving us with net profit divided by shareholders’ equities. 

Here we see this new multiplier, total asset divided by shareholders’ equities, for the first time. However, even if it is new, it’s actually closely related to another term we’ve already come across before, called debt asset ratio.

Recalled that debt asset ratio is calculated by dividing debt by total asset. In addition, one of the most fundamental equations in accounting is that total assets alway equal to the total of liabilities and shareholders’ equities. Combining both, we will get to the following equation:

Now. let’s assume that the total asset of a company remains the same but its liabilities have increased. We know that the debt asset ratio will increase. Once we subtract debt asset ratio from 1 and then invert the result, we will find an increased value for total assets divided by shareholders’ equities. That’s why we said this number is closely related to the debt asset ratio; they move in the same directions, i.e. they are positively related. The higher the debt asset ratio, the higher the indicator. Because it describes the number of times total asset is over shareholders’ equities, it is often referred to as equity multiplier.

Now we know ROE equals to ROA times equity multiplier. If I were a shareholder who wants to increase the ROI of shareholders, I have two ways to achieve my goal. One way is to increase ROA, and another way is to raise the debt level of the company in order to increase equity multiplier. As a matter of fact, raising the debt level seems much easier than raising the ROA. As long as I keep borrowing more money, my ROE will increase. That sounds easy.

However, a prerequisite of this claim is that when raising the equity multiplier, our ROA must stay the same so the product will also increase as a result. Let’s see if that could actually happen.

If I borrow money and just put it in the bank, what’s going to happen to my net profit? Obviously, because the interest rate of deposit is always lower than that of loans, my net profit will decrease. And because borrowing doesn’t affect my shareholders’ equities, the ROE of my company will decrease as a result. 

However, no companies should only borrow money to put it in the bank. Money must be put into work, i.e. investment. But does investment always make money? Not necessarily. It may cause losses, or maybe even more losses than depositing it in the bank.

What does this mean? It means although seemingly there are two ways to increase returns on investment of shareholders; one is to raise ROA, and the other is to increase equity multiplier. The two ways are actually leading to the same result.Even if I decide to borrow more money, I still need to solve the second problem, which is to use borrowed money to make more money. 

From this perspective, we see that the fundamental factor that determines return on investment for shareholders is not how high your debt asset ratio is, but how much the return on investment is for the company as a whole, aka. ROA. For a good company, the most important thing is to create value, which is equivalent to increasing ROA. This is also important to shareholders since the fundamental factor determining the return on investment of shareholders is still the return on investment for the company as a whole, or the ROA.

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For all the terms and formulas we’ve covered regarding how to evaluate the quality of a company, visit this link.

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word-break: break-word; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent p, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent p { color: #000000; font-family: ‘Palatino Linotype’, ‘Book Antiqua’, Palatino, serif; font-size: 18px; font-weight: 400; line-height: 24px; margin: 0 0 10px 0; text-align: center; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent ul, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent ol, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent ul, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent ol { color: #000000; font-family: ‘Palatino Linotype’, ‘Book Antiqua’, Palatino, serif; font-size: 18px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent ol ol, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent ol ol { list-style-type: lower-alpha; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent ol ol ol, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent ol ol ol { list-style-type: lower-roman; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent p a, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent p a { color: #000000; text-decoration: underline; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-block-form .ml-field-group { text-align: left!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-block-form .ml-field-group label { margin-bottom: 5px; color: #333333; font-size: 14px; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif; font-weight: bold; font-style: normal; text-decoration: none;; display: inline-block; line-height: 20px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent p:last-child, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent p:last-child { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody form { margin: 0; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-formContent, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow { margin: 0 0 20px 0; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow { float: left; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-formContent.horozintalForm { margin: 0; padding: 0 0 20px 0; width: 100%; height: auto; float: left; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow { margin: 0 0 10px 0; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow.ml-last-item { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow.ml-formfieldHorizintal { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; height: auto; line-height: 21px !important; margin-bottom: 0; margin-top: 0; margin-left: 0; margin-right: 0; padding: 10px 10px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input::-webkit-input-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input::-webkit-input-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input::-moz-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input::-moz-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input:-ms-input-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input:-ms-input-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input:-moz-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input:-moz-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow textarea, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow textarea { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; height: auto; line-height: 21px !important; margin-bottom: 0; margin-top: 0; padding: 10px 10px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { border-color: #cccccc!important; background-color: #ffffff!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input.custom-control-input[type=”checkbox”]{ box-sizing: border-box; padding: 0; position: absolute; z-index: -1; opacity: 0; margin-top: 5px; margin-left: -1.5rem; overflow: visible; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { border-radius: 4px!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’0 0 8 8’%3e%3cpath fill=’%23fff’ d=’M6.564.75l-3.59 3.612-1.538-1.55L0 4.26 2.974 7.25 8 2.193z’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’-4 -4 8 8’%3e%3ccircle r=’3′ fill=’%23fff’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::before { border-color: #000000!important; background-color: #000000!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::after { top: 2px; box-sizing: border-box; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after { top: 0px!important; box-sizing: border-box!important; position: absolute; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::after { position: absolute; top: 2px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-radio .custom-control-label::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-control, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-control { position: relative; display: block; min-height: 1.5rem; padding-left: 1.5rem; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input { position: absolute; z-index: -1; opacity: 0; box-sizing: border-box; padding: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label { color: #000000; font-size: 12px!important; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif; line-height: 22px; margin-bottom: 0; position: relative; vertical-align: top; font-style: normal; font-weight: 700; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-select, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-select { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; line-height: 20px !important; margin-bottom: 0; margin-top: 0; padding: 10px 28px 10px 12px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; height: auto; display: inline-block; vertical-align: middle; background: url(‘https://assets.mlcdn.com/ml/images/default/dropdown.svg’) no-repeat right .75rem center/8px 10px; 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We’ve already covered how to calculate the return on invested capital, what economic profit is, and how to calculate WACC, a common measure of the cost of invested capital. 

Let’s recall this company below. 

After deducting the cost of invested capital, we found that this company has only generated returns in the first year, reflected by the positive economic profit for the first year and negative economic profit for the other two years. However, this company did have positive net profits in each of the three years from 2008 to 2010.

Here we have an interesting problem at hand. If a company has positive net profit but negative economic profit, would you say it is making money?

When we are calculating the net profit, we have deducted the cost of capital of creditors from the company’s top-line; creditors’ cost of capital is the financial expense of the company. On the other hand, the cost of capital of shareholders is not deducted from the companys top-line. 

Why is that the case? 

Cost of capital of shareholders can be described as the opportunity cost for shareholders to invest in a certain company. A commonly used figure for such cost of capital is the average profitability level in the industry. However, we don’t actually need to pay shareholders such an expense. According to the principle of historical cost, we know money not paid shouldn’t be recorded on the statement. 

Now we are positive that when calculating the net profit, we only deducted one type of cost, which is the cost of capital of creditors. When calculating economic profit, we deducted the cost of invested capital from the return on the invested capital. Since the cost of invested capital has included both cost of capital of creditors and that of shareholders, we have deducted two types of costs before getting to economic profit. 

Why does a company have positive net profit but negative economic profit? 

When a company has positive net profit but negative economic profit, it means that the company has made profits but it hasn’t made money for shareholders after taking into consideration of their cost of capital. The money that shareholders earn from this company is less than what it could be if they invest in other companies. Among the companies in this industry, this company is lagging behind in profitability. 

Let’s think about another question. If the economic profit of one company is positive, what is the excess part? 

Knowing our answer to the previous question, this is not difficult to answer. We just see that economic profit is the residue return minus the cost of capital of shareholders and creditors. This refers to the extra money the company earns after deducting the average profitability level in the industry and bank interests. The extra money, or economic profit, is what shareholders could get on top of the average profitability level if they invest in this particular company rather than any other company in the industry.

Another follow-up question is that if the economic profit is the real money that the company earns for shareholders, what’s the result when I add all the economic profits of the company every year throughout the company’s lifecycle? It is called the value created by the company for shareholders.

We have mentioned that a good company should at least make money. Through several episodes of discussions, we have gone on great lengths to figure out what actually qualifies as “making money”; it doesn’t mean making sales, profit, growth rate, or even profitability rate. Making money, in the short-term, means having positive economic profit, and in the long-term, means creating value for shareholders. Any good company should meet this basic requirement, i.e. making positive economic profit and creating value for shareholders. Once this bar is met, we can then aim for higher goals and move from good to great.

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Now let’s discuss how to calculate the cost of invested capital. 

Just now we discussed who the investors are, i.e. people that would put money into the company. They are creditors of interest-bearing liabilities and shareholders. 

When I borrow money from creditors, would there be any costs? Apparently so. 

But what is the cost? When I borrow money from, say, the bank, there will be interest rates that I will have to bear. That will be my cost of using money from creditors.

But what about shareholder’s money? Does it have costs?

We know that if we use shareholder’s money, we don’t need to pay interests. However, we do need to pay dividends to shareholders. However, dividend payment is voluntary, and no company is forced to give out dividends. In other words, unlike paying back banks with principals and interests, which is protected by laws, a company that doesn’t pay dividends won’t get punished by the law. 

For instance, Berkshire Hathaway, the company led by the world-famous investor Warren Buffett, is famously known to not pay any cash dividends to its shareholders in the history of the company’s existence. However, this hasn’t stopped investors from pumping money into the money and snatching up the company’s stocks, pushing its share prices higher and higher. This just shows that a company can use shareholders’ money without paying dividends.

Therefore, this means that using shareholder’s money will have zero cost right?

Wrong. Big time. 

When a shareholder invests in a company, she automatically loses the opportunity to use the same capital to invest in any other company in the world. What this statement describes is the concept of opportunity cost; the money that a shareholder could have earned by investing in another company represents the cost when he chooses this company.That’s why we call it opportunity cost. Whenever a shareholder invests in one company, he bears such an opportunity cost because he bears the cost of giving up another opportunity.

So what does a shareholder want? He wants to gain return higher than cost. To put it another way, his return is the return of the invested company. His cost is the opportunity cost, which is the return that he could get if he invested in another company. So when he requires returns higher than the cost, it means he hopes this company can generate returns higher than other companies. 

This is a fairly simple idea. For example, let’s assume that one year ago, there were three investment opportunities in front of me. I chose one of them, automatically giving up on the other two. After one year, I wanted to compare how much I could have earned if I invested in the other two companies. Only when the company I invested in earned the highest returns among the three could I be satisfied. Otherwise, even if this company makes money but less than the other two, I will still regret my decision, because I gave up investing in better opportunities.

Now that we’ve understood that the cost to shareholders is opportunity cost; however, since paying dividends is not protected by the law, I can simply ignore them. Can it be done this way? 

Well in a market economy, there will be repercussions. Why? 

As the manager of a company, who hires him? Shareholders. If he can’t give shareholders the required returns, shareholders can change the management with new ones. Even though the shareholder may not be that influential because he is not holding enough stocks, lacking the power to change management of the company, he can vote in other ways. He can withdraw all his holdings from the company to protect himself. If it happens on a massive scale, i.e. when lots of investors sell a company’s stocks in a short period of time, the stock price will drop, eventually causing the dismissal of the management anyway. Such a company can’t survive in the market. That’s why in a market economy, if shareholders ask for returns, the company must provide. 

How much return do shareholders normally ask for? 

We know that an investor’s cost is the opportunity cost that he loses in investing in other companies. But which other companies? 

The companies should have similar risks to the company we’ve invested in. For example, some businesses involved in illegal activities are inherently more lucrative and risky at the same time, and their returns shouldn’t be taken as our opportunity costs. Normally we’d choose companies from the same industry since they share similar risk levels. These companies may make more money or less, and we will use the average return of the industry as our standard of the opportunity cost.

There are two ways to measure the average return of an industry. One is to use the average return on investment in the stock market of that industry to find out the cost. Another way is to calculate the average profitability of the companies in that industry. Here we will use the latter method.

Assuming that we have calculated the cost of capital from creditors and that from shareholders, the next step is to find out the cost of invested capital. A common way of calculation is the weighted average method. For example, let’s assume that 40% of my funds come from creditors with an interest rate of 7%, and 60% come from shareholders. Assuming that the average profitability of the industry is 12%, then we know the cost of invested capital should be calculated as 40% × 7% + 60% × 12% = 10%. The cost of invested capital calculated by the weighted average method is called weighted average cost of capital, or WACC. WACC is the standard of measuring whether a company generates a positive or negative return.

However, there is a minor mistake in the calculation of WACC. Let’s look at an example. 

Assuming there are two companies and their EBITs are completely the same, say 100 dollars. Recall that EBIT refers to the profit before interests and income taxes. How do we get the profit? You may remember that the company gets the net profit after paying interests and taxes, so if we add taxes and interests to the net profit, we will get EBIT or earnings before interests and taxes.

We assume the EBIT of the two companies are the same, and their income tax rates are both 25%. The only difference is that one company borrows money from the bank, while the other one has no loans. For the company having no bank loans, its EBIT is 100 without interest expense. Then we deduct the income tax, or 25% of EBIT, resulting in 75 dollars of net profit.

Now let’s look at the other company with interests. The company has an EBIT of 100, but it needs to pay the bank 20 for interest. After paying the interest, the profit of the company becomes 80 dollars. The company then pays 25% of the 80 dollars as income tax, resulting in a net profit of 60 dollars.

If we compare these two companies, we will discover that the second company pays 20 dollars more than the first company for interest, but its profit is only 15 dollars less. Where is the other five dollars?

The reason is simple. The income tax of the second company is actually 5 dollars less than that of the first company. Even though it needs to pay 20 dollars worth of interest to the bank, 5 out the 20 dollars are actually “paid” by the government. 

This sounds like too good to be true; however, it actually is the case. Since the company pays income tax after interest, the more interest it pays, the less the EBIT the company has, and the less income tax it has to pay to the tax bureau. We call this effect the tax shield of interest. Due to this effect, we now know that although a company pays 20 dollars of interest to the banks, it only bears 15 dollars by itself, or 75%. In this sense, if the interest rate of a bank loan is 7%, now we know the cost we bear is not exactly 7%, but 7% × (1-tax rate). If the tax rate is 25%, out de facto interest rate will be 7% × 75%, or around 5%. This is how we calculate WACC.

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We’ve covered how to calculate return on invested capital in our previous episode. The rates of return on invested capital of this company in 2008, 2009, and 2010 were 10%, 5%, and 6.6% respectively. Given such figures, do you think the company is making money? To be more specific, do you think such a rate of return on invested capital is acceptable? 

What we often hear is that the return on invested capital should at least be on par with loan interest rates, inflation rates, expected return of investors, or industry standards.

However, all of the above rates can be very much different from each other. Loan interests might be much lower than the average profitability rate in the industry; inflation rates could be quite different the expected return of investors. Is there any fixed benchmark for the rate of return on invested capital?

Let’s analyze this question. 

At the end of the day, what the return on invested capital measures is still a type of return on investment. From the simplest sense, what any investor wants is at least not to lose money, i.e. the return should be higher than the cost. Therefore, one type of benchmark for evaluation is the cost of investment from investors. In other words, it is the cost of invested capital.

Let’s assume we have calculated the cost of invested capital (we will get to the calculation of this number in the next episode) for the company in each year from 2008 to 2010, which are 5.7%, 7.6%, and 7.6% respectively. 

Now that we have both the return on the invested capital and cost of invested capital, we can simply let the former minus the latter and see if the result is positve or negative. The result is often referred to as excess return. If the excess return is positive, we’d say such investment is acceptable, and if it is negative, we’d say it is unacceptable. 

From our calculations, we can see that only 2008 yielded a positive excess return. Both year 2009 and 2010 yielded negative excess returns. And since we already know the invested capital for each of the three years, we can get each year’s economic profit by multiplying excess return and invested capital for that particular year.

Apparently, the economic profit was only positive for the first year and negative for the rest two years. In other words, the return on investment of the company is only acceptable in 2008, not in 2009 and 2010. 

This conclusion might come as extremely shocking to a lot of folks, including me. After all, the company has made billions of net profit each year at an annual average growth rate of 26%. How could a profitable and growing company be a bad investment?

The answer lies in cost; like anything in this world, growth and profitability also have prices. And if their prices (or costs) exceed the value of the growth and profitability, the investor could be better off putting her money somewhere else. 

Next, we will cover how to calculate the cost of invested capital.

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} #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’0 0 8 8’%3e%3cpath fill=’%23fff’ d=’M6.564.75l-3.59 3.612-1.538-1.55L0 4.26 2.974 7.25 8 2.193z’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’-4 -4 8 8’%3e%3ccircle r=’3′ fill=’%23fff’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::before { border-color: #000000!important; background-color: #000000!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::after { top: 2px; box-sizing: border-box; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after { top: 0px!important; box-sizing: border-box!important; position: absolute; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::after { position: absolute; top: 2px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-radio .custom-control-label::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-control, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-control { position: relative; display: block; min-height: 1.5rem; padding-left: 1.5rem; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input { position: absolute; z-index: -1; opacity: 0; box-sizing: border-box; padding: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label { color: #000000; font-size: 12px!important; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif; line-height: 22px; margin-bottom: 0; position: relative; vertical-align: top; font-style: normal; font-weight: 700; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-select, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-select { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; line-height: 20px !important; margin-bottom: 0; margin-top: 0; padding: 10px 28px 10px 12px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; height: auto; display: inline-block; vertical-align: middle; background: url(‘https://assets.mlcdn.com/ml/images/default/dropdown.svg’) no-repeat right .75rem center/8px 10px; -webkit-appearance: none; -moz-appearance: none; appearance: none; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow { height: auto; width: 100%; float: left; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-input-horizontal { width: 70%; float: left; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-button-horizontal { width: 30%; float: left; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-button-horizontal.labelsOn { padding-top: 25px; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .horizontal-fields { box-sizing: border-box; float: left; padding-right: 10px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input { background-color: #ffffff; color: #333333; border-color: #cccccc; border-radius: 4px; border-style: solid; border-width: 1px; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px; line-height: 20px; margin-bottom: 0; margin-top: 0; padding: 10px 10px; width: 100%; box-sizing: border-box; overflow-y: initial; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow button { background-color: #000000 !important; border-color: #000000; border-style: solid; border-width: 1px; border-radius: 4px; box-shadow: none; color: #ffffff !important; cursor: pointer; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; font-weight: 700; line-height: 20px; margin: 0 !important; padding: 10px !important; width: 100%; height: auto; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow button:hover { background-color: #1F5014 !important; border-color: #1F5014 !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=”checkbox”] { box-sizing: border-box; padding: 0; position: absolute; z-index: -1; opacity: 0; margin-top: 5px; margin-left: -1.5rem; overflow: visible; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description { color: #000000; display: block; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif; font-size: 12px; text-align: left; margin-bottom: 0; position: relative; vertical-align: top; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow label { font-weight: normal; margin: 0; padding: 0; position: relative; display: block; min-height: 24px; padding-left: 24px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow label a { color: #000000; text-decoration: underline; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow label p { color: #000000 !important; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif !important; font-size: 12px !important; font-weight: normal !important; line-height: 18px !important; padding: 0 !important; margin: 0 5px 0 0 !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow label p:last-child { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedSubmit { margin: 0 0 20px 0; float: left; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedSubmit button { background-color: #000000 !important; border: none !important; border-radius: 4px !important; box-shadow: none !important; color: #ffffff !important; cursor: pointer; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif !important; font-size: 14px !important; font-weight: 700 !important; line-height: 21px !important; height: auto; padding: 10px !important; width: 100% !important; box-sizing: border-box !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedSubmit button.loading { display: none; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedSubmit button:hover { background-color: #1F5014 !important; } .ml-subscribe-close { width: 30px; height: 30px; background: url(‘https://assets.mlcdn.com/ml/images/default/modal_close.png’) no-repeat; background-size: 30px; cursor: pointer; margin-top: -10px; margin-right: -10px; position: absolute; top: 0; right: 0; } .ml-error input, .ml-error textarea, .ml-error select { border-color: red!important; } .ml-error .custom-checkbox-radio-list { border: 1px solid red !important; border-radius: 4px; padding: 10px; } .ml-error .label-description, .ml-error .label-description p, .ml-error .label-description p a, .ml-error label:first-child { color: #ff0000 !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow.ml-error .label-description p, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow.ml-error .label-description p:first-letter { color: #ff0000 !important; } @media only screen and (max-width: 400px){ .ml-form-embedWrapper.embedDefault, .ml-form-embedWrapper.embedPopup { width: 100%!important; } .ml-form-formContent.horozintalForm { float: left!important; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow { height: auto!important; width: 100%!important; float: left!important; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-input-horizontal { width: 100%!important; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-input-horizontal > div { padding-right: 0px!important; padding-bottom: 10px; } .ml-form-formContent.horozintalForm .ml-button-horizontal { width: 100%!important; } .ml-form-formContent.horozintalForm .ml-button-horizontal.labelsOn { padding-top: 0px!important; } } .ml-mobileButton-horizontal { display: none; } #mlb2-14362251 .ml-mobileButton-horizontal button { background-color: #000000 !important; border-color: #000000 !important; border-style: solid !important; border-width: 1px !important; border-radius: 4px !important; box-shadow: none !important; color: #ffffff !important; cursor: pointer; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif !important; font-size: 14px !important; font-weight: 700 !important; line-height: 20px !important; padding: 10px !important; width: 100% !important; } @media only screen and (max-width: 400px) { #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-formContent.horozintalForm { padding: 0 0 10px 0 !important; } .ml-hide-horizontal { display: none !important; } .ml-form-formContent.horozintalForm .ml-button-horizontal { display: none!important; } .ml-mobileButton-horizontal { display: inline-block !important; margin-bottom: 20px;width:100%; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-input-horizontal > div { padding-bottom: 0px !important; } } @media only screen and (max-width: 400px) { .ml-form-formContent.horozintalForm .ml-form-horizontalRow .horizontal-fields { margin-bottom: 10px !important; width: 100% !important; } }

function ml_webform_success_14362251() { var $ = ml_jQuery || jQuery; $(‘.ml-subscribe-form-14362251 .row-success’).show(); $(‘.ml-subscribe-form-14362251 .row-form’).hide(); } fetch(“https://assets.mailerlite.com/jsonp/918262/forms/119753320103413631/takel”)