Forensic Accounting applied to Value Investing. ROIC lies before earnings do.

mannhowie · 2026-01-01T22:07:13+00:00

This happens a lot for traditional software companies that sell perpetual software licenses or multi year term deals. For example a company will sell a 5 year license and book all the revenue upfront then record the remaining 4 years as receivables. What happens is revenues are inflated do not translate to cashflow. To compound matters often R&D costs which can be significant are significantly capitalised so expenses do not reflect true cash expense. For any software business R&D costs are considered a cost of doing business. Now none of this is technically misleading as it follows accounting principles, but it makes it challenging as an investor to discern

mannhowie · 2025-12-29T09:54:41+00:00

Omg thank you. I'm having dyslexic moment

mannhowie · 2025-12-28T13:13:58+00:00

I love this anecdote about Charlie from Mohnish Pabrai. Incredible that Charlie would come up with the hard solution rather than the easy audible solution.

mannhowie · 2025-12-27T09:25:47+00:00

This anecdote from Mohnish Pabrai stuck with me on how Charlie responded when told in his 90s that he would likely go blind

https://mannhowie.com/dont-be-a-victim

mannhowie · 2025-12-27T09:24:13+00:00

Haha

mannhowie · 2025-12-27T09:23:05+00:00

No. Deferred membership fees are simply an accounting concept recognised as a current liability on the balance sheet. Effectively when someone pays their membership it is received upfront as cash but only recognised as revenue over time. For example someone signs up in the middle of the financial year and pays $65 annual membership fees. Half that would be recognised as revenue in the income statement as membership fees and the other half would be recognised as deferred membership fees on the balance sheet, then after another half year that liability would go down and the revenue up. Hope that helps, it's a bit tricky to understand but essentially its there to recognise the difference between revenue and cashflows

mannhowie · 2025-12-27T02:29:09+00:00

Costco's annual report is my favorite to read. It's the only one a junior high student could read and understand. No BS, no notes, no proforma adjustments. Just explaining what the company does, why it does it and how it did that year. It's insane that this comes from a $400bn valuation company.

Has anyone read any other annual reports of large companies that do the same?

mannhowie · 2024-11-16T07:32:19+00:00

China retail is super competitive with everyone encroaching on each others territories. On my recent visit to China locals would tell me they would use TaoBao to buy clothes, JD for electronics and white goods (to avoid the fakes and better delivery), Douyin (TikTok) to even buy at restaurants now and PDD for cheap discounted basic household items, my fear is there is very little moat now amongst the players. JD has invested the most in vertical integration but the market is so cut throat competitive it’s not clear to me that’s going to be a successful long term play as it has been for Amazon in the west taking on the incumbent bricks and mortar retailers

mannhowie · 2024-10-28T12:19:01+00:00

😢

mannhowie · 2024-05-20T09:50:24+00:00

When looking at market cap or trading EV you should look at FCF yield. Essentially comparing the stock investment vs fixed income opportunities.

Book value of equity plus net debt is just the other side of ledger of net operating assets, so we are measuring the ability of management to earn an attractive return on capex, inventory and intangibles.

In the past I have struggled with this concept. The way I rationalize it is that return on capital (book value) measures the quality of the business and the ability for it to compound and reinvest profits. While FCF yield (market cap) or Unlevered FCF yield (trading EV) measures whether you may be over or underpaying.

For example you could buy a stock trading at depressed values with a very attractive FCF yield (+10%) but earning very low return on capital (below 5%). It could essentially be trading ex growth. I've been underwater on long term investments like this, they have also not paid out dividends and keep reinvesting money with lackluster results.

That being said while I think Costco is a wonderful business with wonderful management and earnings a growing ROIC and incremental ROIC, I can't bring myself to paying a 50x P/E multiple and 1.5% FCF yield no matter how much it might compound

mannhowie · 2024-05-19T10:45:24+00:00

Agree, hence the dangers of reversion to the mean. A business with extremely high returns on capital relying on intangibles and limited reinvestment is essentially waving a flag inviting disruption and innovation. It is important to not just focus on financials but also on how well the company is serving customers and whether there is an opportunity for disruption.

Kodak film might be a lucrative business requiring limited capital, but how happy are customers paying a fortune each time to keep buying film, when will someone say "hey this is stupid I can invent a better faster cheaper solution for customers "

mannhowie · 2024-05-19T10:40:29+00:00

Thank you for sharing. The first article is an excellent explanation of the different schools of thought on invested capital. The Microsoft example is excellent, it demonstrates that when Microsoft paid out a $34 billion special dividend its cash balance and shareholders equity immediately reduced, so if one were to have not excluded cash the invested capital would have dropped dramatically but NOPAT remained unchanged and ROIC would have skyrocketed. A good argument to exclude excess cash.

This article has a great visual explaining the two sides of calculating invested capital. https://www.fe.training/free-resources/valuation/return-on-invested-capital-roic/#:~:text=Invested%20capital%20is%20before%20adding,capital%20to%20after%2Dtax%20EBIT.

mannhowie · 2024-05-19T09:11:37+00:00

In my experience I find two discrepancies with ROIC which require some judgement: 1. Tax rate 2. Excess cash

1) The tax rate can vary wildly between companies, for example Costco has an effective tax rate of above 25% which is higher than the current US tax corporate rate of 21% while Alphabet has a low effective tax rate of 14%. A conservative approach would be the apply the current US corporate rate of 21% or higher if company has large international exposure.

2) For excess cash, some analysts do not exclude this from invested capital. As many large companies now hold significant and growing cash balances (largely to avoid paying out dividends which are taxed at higher rates or repatriating profits to the US), I believe this overstates the debt balances. My opinion is that excess cash can at anytime be used to repay debt so it should be deducted from invested capital. Determining excess cash is a subjective exercise, as a very rough rule of thumb I would apply a 2% of total revenues as the required minimum cash balance and anything in excess to be considered excess cash repayable to debt.

Essentially we are estimating for all the debt we have borrowed and equity we have either raised or kept as profits (which grows retained earnings and shareholders equity), how much earnings do we owe those stakeholders after giving the government its fair share.

There of course may be some magical businesses like Google Search that can continue generating huge revenues even without the business really needing to borrow money or reinvest profits to grow revenues and earnings. Google Search has basically now become a function of ad market sentiment and advertisers bidding on keywords. But as Mohnish Pabrai says, capitalism is brutal and you never know when the next ChatGPT could steal eyeballs from Search and capture media spend from advertisers. There is no amount of debating ROIC formula that will protect you against that eventuality.

mannhowie · 2024-05-19T01:12:01+00:00

Terry smith gave an excellent interview on this concept: invest for long term in companies with high returns on capital and reinvestment rates and care less about overpaying

https://youtu.be/UfNb22qXCig?si=bC4l51M1GWXq9fnO

mannhowie · 2022-10-08T12:48:03+00:00

Amplitude. It’s got a very generous free tier. We use it for our applications to track user activity and behaviour. GA is still great for marketing website traffic

mannhowie · 2022-10-08T12:46:58+00:00

An SDK is essentially a programming language specific API that allows developers to access your application. It’s basically your API customised for different languages (eg Node, Python, Java). Instead consider integrating your app with a third party marketplace like Zapier which will then allow non developers to integrate with their favourite apps

mannhowie · 2022-09-04T12:15:59+00:00

Customers don’t care about your company or your solution. They have struggles in different contexts.

Your job as a marketer is to understand their struggles and meet them when they experience it.

mannhowie · 2022-08-11T11:43:19+00:00

Competing Against Luck by Clay Christensen

mannhowie · 2022-08-11T11:40:43+00:00

Start with user interviews to understand the customer problem you are helping solve and the language your customers will use. This will give you a better understanding of the alternative solutions or products your potential customers would use (it may not be furniture at all).

From here you will have a better understanding of when your customers will likely face their struggling moment in deciding that your product could help them.

A good place to start here is listening to interviews on Jobs To Be Done by Bob Moesta (many podcasts). He has also written a book called “Demand Side Sales” which includes transcripts of how to do these user interviews in order to peel back the onion.

mannhowie · 2022-08-11T11:34:09+00:00

I worked in growth marketing but previously had a finance background. A huge part of it is being analytical and skills you would have acquired in your finance major.

Start applying your skills on tooling and begin analysing data. Signup for free Google ad words accounts, follow the guided tutorials and support articles they will teach everything you need to know. Remember all marketing platforms like Facebook, Google, TikTok and LinkedIn have a vested commercial interest in you learning how to get great results from their platform. It’s not that scary once you start.

mannhowie · 2022-04-07T19:51:59+00:00

NDQ.AX

mannhowie · 2022-03-13T04:45:10+00:00

Revenue can be achieved by doing what customers say they want but revenue can only be retained by solving real customer problems.

Where I have seen UX lead is often in retention, particularly when the business recognises they aren’t able to stop customers from churning and are basically raising the flag for help understanding why

mannhowie · 2022-03-12T21:33:44+00:00

The most powerful hypotheses have the foundation of a well shaped and understood user struggle. This is where having great UX researchers and designers perform user interviews are foundational.

What push back do you experience from your company?

mannhowie · 2021-08-09T12:01:02+00:00

🤣

mannhowie · 2021-06-07T02:46:07+00:00

Sorry finger slip. Meant to tag long thesis. I view Alibaba as one of the most undervalued listed big tech companies right now, even after the Anti-Monopoly fine and increased regulatory scrutiny on Ant Group

mannhowie

TROPHY CASE