Centralized Cryptocurrency Exchanges
The popularity of cryptocurrency is causing investors to make a beeline for buying into the cryptocurrency boom. The trading activity in these markets has increased manifold in the past few years. However, novice investors can find it difficult to understand how cryptocurrency is bought and sold. This is particularly important since there is more than […]
The Sunk Cost Fallacy
In the previous article, we learned about how certain psychological factors make a huge impact on our decision-making about financial investment. We studied about what loss aversion is and how it impacts the decisions that we make. There is another psychological fallacy that is responsible for a lot of losses in the stock market. In […]
Variations in Cash Flow Models
We are now aware of how to use the basic single stage models for both free cash flow to the firm (FCFF) and free cash flow to equity (FCFE). It is now time to look into more advanced models which involve two or more stages for which cash flows will be predicted. Now, we need […]
Vulture Funds: The Name Says It All
What Do Vulture Funds Do ? Countries and companies are in turmoil all the time. When entities are close to financial distress, the normal tendency of investors is to flee. Common investors think that no more money can be made when an asset is about to hit rock bottom. This is not the case with […]
Bank Loans vs. Bonds: Debt Financing in Infrastructure Projects
Debt financing is the most important source of finance for infrastructure projects. In most infrastructure projects, the majority of the project is funded using debt-based financial instruments. Equity holders invest a significantly smaller amount. However, they bear all the risks. The size and scale of debt financing make it an important decision for any company […]
Return on Invested Capital (ROIC) is another popular metric that is used widely in financial analysis. The reason for its popularity is that like ROA, ROIC can be used by both equity and debt holders. Also, like ROA, it provides data about return to the company as a whole and is not affected by leverage. Here is more about Return on Invested Capital;
The formula for calculating ROIC is as follows:
Return on Invested Capital = EBIT / Invested Capital
Invested capital is derived by starting from the Balance Sheet Liabilities total and then subtracting the current liabilities from it. This is because current liabilities are not sustainable sources of long term financing and therefore cannot qualify as capital.
The Return on Invested Capital (ROIC) metric measures the company’s efficiency at allocating its resources to generate the maximum return. Thus ROIC shows the relationship between invested capital and return. It must be thought about as having Rs X in earnings for every rupee in invested capital.
No Break-Up Provided: ROIC does not provide break up about whether income has been earned from regular operations or from one time activities.
Used to Evaluate Acquisitions: Return on Invested Capital (ROIC) is useful in case of companies that have done many acquisitions. Since it is difficult to segregate the cash flows of the two merged companies, ROIC with and without the acquisition serves as a measure of gauging success.
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