The most important metric for investors?
Return On Invested Capital (ROIC)
I'll teach you everything you need to know in 2 minutes:
Return On Invested Capital (ROIC)
I'll teach you everything you need to know in 2 minutes:
1️⃣ What is Return On Invested Capital?
Return on invested capital (ROIC) is a calculation used to determine how well a company allocates its capital to profitable projects or investments.
Return on invested capital (ROIC) is a calculation used to determine how well a company allocates its capital to profitable projects or investments.
2️⃣ How high should ROIC be?
Capital allocation is the most important task of management.
As a rule of thumb, the ROIC should be higher than 10% and preferably higher than 15%.
Capital allocation is the most important task of management.
As a rule of thumb, the ROIC should be higher than 10% and preferably higher than 15%.
3️⃣ Why is it important?
▪️ A high ROIC + plenty of growth opportunities = golden egg
▪️ ROIC > WACC because otherwise growth destroys value
▪️ A consistent and high ROIC indicates that the company has a moat
▪️ A high ROIC + plenty of growth opportunities = golden egg
▪️ ROIC > WACC because otherwise growth destroys value
▪️ A consistent and high ROIC indicates that the company has a moat
4️⃣ How to calculate ROIC?
Return On Invested Capital = Net Operating Profit After Tax (NOPAT) / Total invested capital
NOPAT = Net Operating Profit After Tax
Invested Capital = Total assets - non-interest-bearing current liabilities
Return On Invested Capital = Net Operating Profit After Tax (NOPAT) / Total invested capital
NOPAT = Net Operating Profit After Tax
Invested Capital = Total assets - non-interest-bearing current liabilities
5️⃣ ROIC vs ROE
In ROIC:
•You use NOPAT as a numerator
•You use all invested capital (debt + equity) as denominator
In ROE:
•You use Net Income as a numerator
•You only take the equity part into account as denominator
In ROIC:
•You use NOPAT as a numerator
•You use all invested capital (debt + equity) as denominator
In ROE:
•You use Net Income as a numerator
•You only take the equity part into account as denominator
That's it for today.
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It teaches you how to read Financial Statements like a professional.
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