Comments on: Calculating Return On Invested Capital http://dividendmoney.com/what-is-return-on-invested-capital/ Personal Finance With A Cash Flow Focus Sun, 13 May 2012 02:19:07 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: Cavemanus http://dividendmoney.com/what-is-return-on-invested-capital/comment-page-1/#comment-8974 Cavemanus Wed, 24 Oct 2007 18:05:05 +0000 http://dividendmoney.com/what-is-return-on-invested-capital/#comment-8974 Good article. This is one of my favorite metrics. I use ROIC in my models and I similarly compare it to the PE ratio. To be precise, I use the inverse and look for companies with a PE/ROIC of less than 1. I will note that I have been using a slightly different formula for ROIC. ((1 - tax rate) * EBIT) / (Average Shareholder Equity + Average Debt) When I am looking at a trailing twelve month period, I like to use the average shareholder equity over the time period as well as average debt. I would use this for ROE calculations as well. I use NOPAT ((1 - tax rate) * EBIT) in the numerator to focus on operating activities. In general, this can make my numbers for ROIC slightly higher than the formula you use. This is because some companies have non-operational charges or expenses. However, upon reflection, I am wondering if it is right for me to exclude interest expense when I am accounting for the debt being expensed in the denominator. Any thoughts? For a company with no debt and no charges, both formulas, as well as ROE, will be the same. There is no one correct metric. In my opinion it is simply important to decide to use one of them and then consider which works best for you. You can see my model for non-financial comanies here: http://cavemanus.blogspot.com/2007/09/cave-modelxls.html Thans for getting me thinking. Good article. This is one of my favorite metrics. I use ROIC in my models and I similarly compare it to the PE ratio. To be precise, I use the inverse and look for companies with a PE/ROIC of less than 1.

I will note that I have been using a slightly different formula for ROIC.

((1 – tax rate) * EBIT) / (Average Shareholder Equity + Average Debt)

When I am looking at a trailing twelve month period, I like to use the average shareholder equity over the time period as well as average debt. I would use this for ROE calculations as well.

I use NOPAT ((1 – tax rate) * EBIT) in the numerator to focus on operating activities. In general, this can make my numbers for ROIC slightly higher than the formula you use. This is because some companies have non-operational charges or expenses.

However, upon reflection, I am wondering if it is right for me to exclude interest expense when I am accounting for the debt being expensed in the denominator. Any thoughts?

For a company with no debt and no charges, both formulas, as well as ROE, will be the same. There is no one correct metric. In my opinion it is simply important to decide to use one of them and then consider which works best for you.

You can see my model for non-financial comanies here:
http://cavemanus.blogspot.com/2007/09/cave-modelxls.html

Thans for getting me thinking.

]]> By: Tyler http://dividendmoney.com/what-is-return-on-invested-capital/comment-page-1/#comment-4031 Tyler Thu, 07 Jun 2007 15:54:16 +0000 http://dividendmoney.com/what-is-return-on-invested-capital/#comment-4031 Jungle, I wouldn't say that this measure is exclusive of any other metric used to value a stock, just another indicator. I would suppose that simply put, one could say that we want a return for our invested dollar that is more than the cost for that company's dollar of earnings. Jungle,
I wouldn’t say that this measure is exclusive of any other metric used to value a stock, just another indicator.
I would suppose that simply put, one could say that we want a return for our invested dollar that is more than the cost for that company’s dollar of earnings.

]]> By: Financial Jungle http://dividendmoney.com/what-is-return-on-invested-capital/comment-page-1/#comment-4019 Financial Jungle Thu, 07 Jun 2007 04:16:44 +0000 http://dividendmoney.com/what-is-return-on-invested-capital/#comment-4019 Makes sense. The higher the ROIC, the greater the premium (i.e. higher P/E.) Everything else being equal, how come ROIC = PE is the tipping point whether a stock is over/under valued? Makes sense. The higher the ROIC, the greater the premium (i.e. higher P/E.)

Everything else being equal, how come ROIC = PE is the tipping point whether a stock is over/under valued?

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