22 min
Analyzing Return on Incremental Invested Capital, with John Zolidis, President, Quo Vadis Capital Signals by AlphaSense
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- Business
Episode Summary
In this episode we spoke with John Zolidis, President at Quo Vadis Capital. John has over 25 years of Wall Street experience analyzing unit-based businesses, such as restaurants and retailers.
We covered a number of topics including unit economics, Return on Invested Capital (ROIC), and Return on Incremental Invested Capital (ROIIC). John also discussed specific aspects of ROIIC, including cohorting, differences in capital allocation decisions of public and private concepts, understanding franchisee economics in the case of franchised businesses, and a lot more. The guest explains in detail the work that goes into understanding the true performance of the newest cohort of stores, finding inflection points in ROIIC which leads to estimate and revision changes.
Guest-at-a-Glance
💡 Name: John Zolidis
💡 What he does: He's the president of Quo Vadis Capital.
💡 Company: Quo Vadis Capital
💡 Noteworthy: John has over 25 years of experience analyzing unit-based businesses, such as retailers and restaurants, and is a very sophisticated practitioner in the space.
💡 Where to find John: LinkedIn
Key Insights
⚡ What is Return on incremental Invested Capital (ROIIC)? We use ROIIC to make investment decisions and determine the impact of strategic investments on a business. But what is ROIIC? John explains, "Unit-level ROIC is what is the return metric of the average store restaurant, et cetera of a business. When we talk about return on incremental invested capital, what we mean is what's the return profile of the most recent cohort of stores, restaurants, et cetera, that a business has opened. Put differently, what is the return profile of the most recent dollar being allocated by the business into growth."
⚡ The return that the franchisees get is essential. When analyzing franchised businesses, John pays very close attention to franchisee performance. John explains, "Nevertheless, the return that the franchisees achieve with their stores or restaurants or car washes or whatever it is, that, among the list that you mentioned, is really important. And it's important for a couple of reasons, but I think the main reason from a Wall Street investment standpoint is that the returns that the franchisees generate act as a direct governor on growth, which is to say the cash flow produced at the unit level relative to the cost of opening up a new unit tells you how fast the franchisees can increase their system and that's important to the franchisor, the parent company, which is where the equity in Wall Street typically is. So it is relevant to see what the return metrics are like for the franchise. It does have a direct implication on growth. And then, I think it's also important to know that you're investing in a concept that creates value for all members of the chain, not just the parent company. And that is a sustainable continuous business that you can feel good about being involved with."
⚡ There are different criteria for determining whether a certain stock is a ‘buy’ or ‘sell.’ How can you use ROIIC to determine whether a certain stock should be bought or sold? John explains. "There's a ton of work. It is quite tedious. I wouldn't say it's a lot of fun to build the models that generate all of these metrics. But essentially, we have a battery of tests that we apply to the output of this. So the first one is a quality filter. [...] The second piece is a trend analysis. [...] Then, the third filter is related to return on incremental invested capital. So this is where we zero in on the company's most recently opened cohort of stores. [...] Then lastly there, we also have a valuation-based approach for unit-level concepts."
Episode Summary
In this episode we spoke with John Zolidis, President at Quo Vadis Capital. John has over 25 years of Wall Street experience analyzing unit-based businesses, such as restaurants and retailers.
We covered a number of topics including unit economics, Return on Invested Capital (ROIC), and Return on Incremental Invested Capital (ROIIC). John also discussed specific aspects of ROIIC, including cohorting, differences in capital allocation decisions of public and private concepts, understanding franchisee economics in the case of franchised businesses, and a lot more. The guest explains in detail the work that goes into understanding the true performance of the newest cohort of stores, finding inflection points in ROIIC which leads to estimate and revision changes.
Guest-at-a-Glance
💡 Name: John Zolidis
💡 What he does: He's the president of Quo Vadis Capital.
💡 Company: Quo Vadis Capital
💡 Noteworthy: John has over 25 years of experience analyzing unit-based businesses, such as retailers and restaurants, and is a very sophisticated practitioner in the space.
💡 Where to find John: LinkedIn
Key Insights
⚡ What is Return on incremental Invested Capital (ROIIC)? We use ROIIC to make investment decisions and determine the impact of strategic investments on a business. But what is ROIIC? John explains, "Unit-level ROIC is what is the return metric of the average store restaurant, et cetera of a business. When we talk about return on incremental invested capital, what we mean is what's the return profile of the most recent cohort of stores, restaurants, et cetera, that a business has opened. Put differently, what is the return profile of the most recent dollar being allocated by the business into growth."
⚡ The return that the franchisees get is essential. When analyzing franchised businesses, John pays very close attention to franchisee performance. John explains, "Nevertheless, the return that the franchisees achieve with their stores or restaurants or car washes or whatever it is, that, among the list that you mentioned, is really important. And it's important for a couple of reasons, but I think the main reason from a Wall Street investment standpoint is that the returns that the franchisees generate act as a direct governor on growth, which is to say the cash flow produced at the unit level relative to the cost of opening up a new unit tells you how fast the franchisees can increase their system and that's important to the franchisor, the parent company, which is where the equity in Wall Street typically is. So it is relevant to see what the return metrics are like for the franchise. It does have a direct implication on growth. And then, I think it's also important to know that you're investing in a concept that creates value for all members of the chain, not just the parent company. And that is a sustainable continuous business that you can feel good about being involved with."
⚡ There are different criteria for determining whether a certain stock is a ‘buy’ or ‘sell.’ How can you use ROIIC to determine whether a certain stock should be bought or sold? John explains. "There's a ton of work. It is quite tedious. I wouldn't say it's a lot of fun to build the models that generate all of these metrics. But essentially, we have a battery of tests that we apply to the output of this. So the first one is a quality filter. [...] The second piece is a trend analysis. [...] Then, the third filter is related to return on incremental invested capital. So this is where we zero in on the company's most recently opened cohort of stores. [...] Then lastly there, we also have a valuation-based approach for unit-level concepts."
22 min