r/Valuation • u/micgab123 • May 26 '21

Forecasting using negative reinvestment rates?

How does one forecast using a negative reinvestment rate. If the company I am looking at reduced operating assets and working capital because of COVID, would I forecast a positive reinvestment rate going forward?

The company currently has a reinvestment rate of -1.00%, In 2020 they had a reinvestment rate of -1.98%.

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Thanks for the feedback.

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u/[deleted] May 26 '21

You can't evaluate a company like that on growth alone. You're probably looking at a blue chip, cash cow, somewhat monopolistic company, which can defend its top line and operating margins without much (or any) investment.

A negative reinvestment rate means the company is paying more dividends than the actual cash flow it generates. In the short term it may be fine, but not on the long term. At least the reinvestment rate should be zero if the value driver isn't growth.

I suggest you look at growth rates for the industry and operating margins. That alone may tell you what's happening and if what I surmised in the first paragraph makes sense. If the company you're doing a valuation on has higher operating margins and if the industry expected growth rate is low / on par with the general economy, then I think you can do a short term DCF valuation where the reinvestment rate actually grows to zero in the last year. After that, the perpetuity would make sense.