Francesco Curto - Valuing and Investing in Equities: Croci: Cash Return on Capital Investment

1. Figures in Chapter 1
2. Figures in Chapter 2
3. Figures in Chapter 3
4. Figures in Chapter 4
5. Figures in Section 2
6. Figures in Chapter 5
7. Figures in Chapter 6
8. Figures in Chapter 7
9. Figures in Chapter 8
10. Figures in Chapter 9
11. Figures in Chapter 10

Francesco Curto

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Notices

Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary.

Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility.

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Francesco Curto is the Head of the CROCI Investment Valuation Group and the Head of the Research House at DWS, one of the world's leading asset managers.

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The information and opinions contained in this document are for information and discussion purposes only, do not constitute a financial promotion or do not purport to be fully complete. Whilst the author has used his best efforts to ensure the accuracy or completeness of any information continued herein, no reliance may be placed for any purpose on the information or opinions contained in this book for their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this book and no liability accepted for the accuracy or completeness of any such information or opinions.

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To Chantal, Nicolas, Emanuel and Batrice.

To my mother, Cosima, and my sisters, Giovanna, Anna, Daniela.

To Italy and Salento, that I miss more than I can say.

To my friends, fore te capu.

Dear reader,

CROCI is a DWS Group trademark that stands for Cash Return on Capital Invested. The acronym refers to a valuation technique used for research and investments. It was coined by a group of friends who arrived at DB in the mid-1990s. Back then, the single European financial market was still in the making, and so comparing valuations of companies across Europe was a challenge. CROCI enabled full comparability across sectors and markets, providing an excellent basis for market analysis and investments.

In the early days, the team spent what now seems like an endless number of meetings explaining how we adjust valuation and why. Confusion was the norm, and the most common question was why? Why do you go through so much pain? Why do you make this adjustment? Our answer was to highlight the errors of traditional approaches and explain why adjustments to valuations were required. Now the answer is different: we do this because it is what you would do if you were buying a company with your own money. That is the simple reality: the moment that you consider buying a listed stock, you are about to buy a piece of a company. If you buy a piece of a company, then you perform due diligence on its accounts, making the necessary adjustments to ensure a proper economic basis for valuing the company. Some companies are easy to analyse, others are more complicated, and others still are impossible. If the latter is the case, then you move on to the next one. This is what you would do if you were buying the company with your own money. As agents we ought to do the same. Once you have a proper basis for comparing valuations, how should you build an investment strategy? How should you analyse the market? Or the economy? Within this book, I take the reader through this journey.

This is the frame of mind that people should be in when reading this book. At the beginning and at the end of the process, there is an investor who has some capital and is expecting a return. There are similarities between CROCI and Alice in Wonderland. Once you go through the looking glass, it is difficult to go back to the old ways. Whatever is your journey, I hope you enjoy this book!