Ritchie Bros. (RBA), a heavy equipment operator, is inflating its ROIC calculation by excluding the cost of debt, a recurring expense necessary to fund the company’s recent acquisition spree. The change happens to coincide with Ritchie’s announcement that it will take on as much as $2.8 billion in debt— nearly 4x the company’s current debt— to acquire vehicle auction platform IAA (IAA) for $7.3 billion.

Instead of dividing net income by average invested capital, Ritchie now divides what it calls “reported return” by average invested capital. Reported return is defined as net income attributable to stockholders excluding the impact of net interest expense, tax effected at the Company’s adjusted annualized effective tax rate.

Ritchie is also changing how it calculates the denominator. To its credit though, it now includes short term debt when it calculates ROIC. How the company previously justified excluding short term borrowings isn’t evident in its filings.

The calculation change inflated Ritchie’s “reported return” by $40.5 million, or 13.3% of net income (the prior numerator in ROIC calculation).

Rather than a ROIC of 13.5%, the change resulted in Ritchie reporting a 17% ROIC.

Notably, Ritchie’s ROIC falls to 10% when stock based compensation (SBC) and acquisition related costs— both are recurring expenses and core components of Ritchie’s business model— aren’t added back as the company does.

It’s the second time in a year Ritchie has changed how it calculates key metrics. In November 2021, we published a note highlighting that Ritchie had unveiled four new key metric calculations that, in total, increased profits $55.8 million. The new calculation added $24.1 million to Ritchie’s operating income.

Operating income accounts for one third of Ritchie’s short term Executive Bonus calculation.

We also noted the calculation changes appeared to have been made to mask underlying weakness in Ritchie’s business. Each of Ritchie’s adjusted metrics was down between 9-11% from the prior year’s quarter.