136:
said to more closely reflect the cash return of a firm over a given period of time. However, others (such as Warren
Buffett) argue that depreciation should not be excluded seeing that it represents a real cash outflow. When a company purchases a depreciating asset, the cost is not immediately expensed on the income statement. Instead, it is capitalized on the balance sheet as an asset. Over time, the depreciation expenses on the income statement will reduce the asset value on the balance sheet. In turn, depreciation represents the delayed expensing of the initial cash outflow that purchased the asset, and is thus a rather liberal accounting practice.
152:
The cost of capital is the return expected from investors for bearing the risk that the projected cash flows of an investment deviate from expectations. It is said that for investments in which future cash flows are incrementally less certain, rational investors require incrementally higher rates of
135:
Some practitioners make an additional adjustment to the formula to add depreciation, amortization, and depletion charges back to the numerator. These charges are considered by some to be "non-cash expenses" which are often included as part of operating expenses. The practice of adding these back is
156:
Since return on invested capital is said to measure the ability of a firm to generate a return on its capital, and since WACC is said to measure the minimum expected return demanded by the firm's capital providers, the difference between ROIC and WACC is sometimes referred to as a firm's "excess
130:
rather than the value of the end of the year. This is because the NOPAT represents a sum of money flows, while the value of the invested capital changes every day (e.g., the invested capital on
December 31 could be 30% lower than the invested capital on December 30). Because the exact average is
46:, as a measure of the profitability and value-creating potential of companies relative to the amount of capital invested by shareholders and other debtholders. It indicates how effective a company is at turning capital into profits.
153:
return as compensation for bearing higher degrees of risk. In corporate finance, WACC is a common measurement of the minimum expected weighted average return of all investors in a company given the riskiness of its future cash flows.
122:
as the denominator. This procedure is done because, unlike market values which reflect future expectations in efficient markets, book values more closely reflect the amount of initial capital invested to generate a
144:
Because financial theory states that the value of an investment is determined by both the amount of and risk of its expected cash flows to an investor, it is worth noting ROIC and its relationship to the
339:
314:
131:
difficult to calculate, it is often estimated by taking the average between the IC at the beginning of the year and the IC at the end of the year.
238:
419:
178:
146:
115:
490:
550:
307:
171:
204:
209:
270:"Return on Capital (ROC), Return on Invested Capital (ROIC), and Return on Equity (ROE): Measurement and Implications"
107:, which means that after-tax expenses (income) from financing activities are added back to (deducted from) net income.
472:
226:
545:
484:
300:
184:
431:
518:
443:
269:
425:
368:
507:
460:
357:
258:
Fernandes, Nuno. Finance for
Executives: A Practical Guide for Managers. NPV Publishing, 2014, p. 36.
232:
111:
110:
While many financial computations use market value instead of book value (for instance, calculating
397:
345:
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39:
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478:
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408:
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119:
100:
96:
58:
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373:
363:
199:
539:
524:
513:
449:
502:
403:
43:
437:
413:
379:
91:
There are three main components of this measurement that are worth noting:
391:
35:
385:
292:
351:
104:
54:
296:
16:
Measure of profitability relative to invested capital
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The denominator represents the average value of the
49:The ratio is calculated by dividing the after tax
308:
8:
277:New York University Stern School of Business
103:use net income as the numerator, ROIC uses
315:
301:
293:
251:
239:Tendency of the rate of profit to fall
118:(WACC)), ROIC uses book values of the
105:net operating income after tax (NOPAT)
420:Present value of growth opportunities
340:Cyclically adjusted price-to-earnings
179:Fairfield Plaza, Inc. v. Commissioner
7:
386:Enterprise value/gross cash invested
114:or calculating the weights for the
57:) by the average book-value of the
65:Return on invested capital formula
14:
147:weighted average cost of capital
116:weighted average cost of capital
491:Risk-adjusted return on capital
172:Cash flow return on investment
1:
205:Rate of return on a portfolio
352:Cash return on cash invested
210:Recovery of capital doctrine
567:
473:Return on capital employed
227:Return on capital employed
28:return on invested capital
485:Return on tangible equity
330:
185:Negative return (finance)
438:Price-earnings to growth
82:Average Invested Capital
380:Enterprise value/EBITDA
392:Enterprise value/sales
140:Relationship with WACC
34:), is a ratio used in
551:Investment indicators
112:debt-to-equity ratios
95:While ratios such as
461:Return on net assets
233:Return on net assets
346:Capitalization rate
268:Damodaran, Aswath.
190:Profit maximization
519:Sustainable growth
533:
532:
467:Return on capital
335:Buffett indicator
20:Return on capital
558:
546:Financial ratios
479:Return on equity
455:Return on assets
409:Operating margin
324:Financial ratios
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310:
303:
294:
287:
286:
284:
283:
274:
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259:
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215:Return on assets
128:invested capital
120:invested capital
101:return on assets
97:return on equity
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59:invested capital
51:operating income
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426:Price/cash flow
369:Dividend payout
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279:
272:
267:
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253:
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221:Return on brand
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159:economic profit
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81:
78:
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17:
12:
11:
5:
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508:Short interest
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432:Price-earnings
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374:Earnings yield
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364:Dividend cover
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358:Debt-to-equity
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200:Rate of profit
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124:
108:
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6:
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3:
2:
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450:Profit margin
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414:Price-to-book
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398:Loan-to-value
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195:Profitability
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157:return", or "
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280:. Retrieved
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143:
134:
90:
48:
31:
27:
23:
19:
18:
497:Risk return
444:Price-sales
382:(EV/EBITDA)
540:Categories
394:(EV/Sales)
348:(Cap Rate)
282:2015-10-20
246:References
44:accounting
149:(WACC).
40:valuation
388:(EV/GCI)
165:See also
525:Treynor
514:Sortino
493:(RAROC)
354:(CROCI)
174:(CFROI)
123:return.
85:
73:
71:ROIC =
61:(IC).
36:finance
503:Sharpe
487:(ROTE)
475:(ROCE)
463:(RONA)
428:(P/CF)
422:(PVGO)
342:(CAPE)
235:(RoNA)
229:(ROCE)
26:), or
521:(SGR)
510:(SIR)
499:(RRR)
481:(ROE)
469:(ROC)
457:(ROA)
446:(P/S)
440:(PEG)
434:(P/E)
416:(P/B)
404:Omega
400:(LTV)
376:(E/P)
360:(D/E)
273:(PDF)
223:(ROB)
217:(RoA)
76:NOPAT
55:NOPAT
99:and
42:and
32:ROIC
161:".
24:ROC
542::
275:.
38:,
316:e
309:t
302:v
285:.
79:/
53:(
30:(
22:(
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