ROIC (Return on Invested Capital)

vasa1 · #1 20th December 2009, 05:53 PM

Alchemist, I searched the site and didn't find the phrase, hence the topic.

I came across a couple of mentions of this ratio as being quite useful.

This is a link from Investopedia on the ratio and some quotes ...

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investors can't just pull ROIC straight off a financial document like they can with better known performance ratios; calculating ROIC requires a bit more work.

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mainly for assessing companies in industries that invest a large amount of capital - such as oil and gas players, semiconductor chip companies, and even food giants - ... . For many industrial sectors, ROIC is the preferred benchmark for comparing performance.

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Investors should look not only at the level of ROIC but also the trend. A falling ROIC can provide an early warning sign of a company's difficulty ...

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ROIC = Net Operating Profits After Tax (NOPAT) / Invested Capital.

Quote:

But in the complex financial statements published by companies, generating an accurate number from the formula can be trickier than it appears.

Alchemist · #2 21st December 2009, 06:34 PM

I agree that ROIC can be a good tool for financial analysis.

ROIC (Return on Invested Capital) and ROC (Return on Capital) are one and the same.

ROIC tells us how efficient the core business of the company is.

The net profit figure that we get for a company, includes income/expenditure arising out of investments/debt of the company.

This "net profit" doesn't give us the true picture of the profitability of the core business of the company.

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ROIC is ratio of NOPAT to the capital invested in the core business.

For NOPAT, the operating profit is considered, but it is adjusted for taxes.

NOPAT (Net Operating Profits After Tax)

=

EBIT (1-tax rate).

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If EBIT is 100 and tax rate applicable to the company is 30%, NOPAT will be

100 (1 - 0.3) = 100*0.7 = 70.

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For the denominator of ROIC, we need to consider the capital invested in the core business.

A simple explanation of the capital invested is

"Book Value of Equity" + "Book Value of Debt" - (Cash and Investments).

We subtract "cash and investments" as they haven't been employed in the core business.