In this workout, we're going to calculate and analyze return on opening invested capital for Chester Inc. And we're going to use this to predict the likely returns from the investment into new facilities. We'll start by calculating return on invested capital, and we're going to use the notepads and opening invested capital figures provided to us. And then I'm going to copy these to the right. We can see that return on invested capital has remained at around 15% over the last three years. Although it has dropped very slightly in the last year, we might therefore initially expect a return about 15% on the new facilities once they are up and running. Note that a typical trend is for return on invested capital to fall slightly when investing in new facilities, as it can take a while for new operations to reach full capacity. And we sometimes refer to this as a drag on return on capital from new investment. We can dig a bit deeper in our analysis by calculating return on new capital, and that is the change in NOPAT each year, divided by the change in invested capital.

So the change in NOPAT divided by the change in invested capital, and we calculate that for 20X2 and 20X3. When we do this, the trend is a bit more concerning, we see that returns on new capital were just 8% in the latest year. This means that the company must be generating a return of more than 15% on its existing capital. If when combined with the return on new capital of 8%, the overall return is 14.8%. This does lead us to question what happened in the last financial year? Could it be that the company has already made some investment in new facilities, which is creating a drag on returns or something else, which is more concerning? Let's do some Dupont analysis to see if we can get a better understanding of the trend in return on capital. First, let's calculate NOPAT margin, and now let's calculate invested capital turnover.

When we do this, we can see that we have two opposing trends here. We have falling profit margins and increasing capital turnover. Falling profit margins are particularly concerning as it suggests that they are losing their competitive advantage. A common feature of a company which is maturing. Also, although the increasing invested capital turnover could be a sign of increasing efficiency, remember that invested capital is the same as capital employed. If sales are increasing relative to the asset base, this could be indicative of an aging asset base. Again, the sign of a maturing company. If this is true, then even a 15% return on the new facilities looks ambitious and future returns on the new facilities of close to 10% seem much more likely.