Return on Invested Capital (ROIC) in Real Life: Beyond the "Investopedia Version"

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In this tutorial, you'll learn all about Return on Invested Capital (ROIC) and what it tells you about a company's valuation and your assumptions in financial models.
Files & Resources:
breakingintowallstreet.com/kb...
Table of Contents:
0:00 Introduction
0:52 The Short Answer
4:53 Part 1: ROIC Calculations for Target and Best Buy
8:08 Part 2: ROIC in LBO and DCF Models
9:26 Part 3: Issues with ROIC and Its Use in Models
11:08 Recap and Summary

[@PoppAlexander]

A common error made in the computation of return on capital is using actual taxes paid in the computation of the after-tax operating income. This will result in a double counting of the tax benefit from debt, once in the return on capital (which will be increased because of the interest tax savings) and again in the cost of capital (which will be reduced the reflect the same tax benefit)

[@nurlan6588]

ROIC is one of the key drivers of company value along with sales growth. The higher ROIC more efficient company operates and higher valuation multiples. It shows how effectively a company deployed its capital.

[@financialmodeling]

Thanks for the summary (I hope this isn't AI-generated...).

[@nurlan6588]

@@financialmodeling It's not 😀. 100% human generated. I found your channel and it's interesting. Will be following you. Thank you.

[@thelifeofpablo6626]

Thanks, very interesting!

[@financialmodeling]

Thanks for watching!

[@tituskiprono743]

Am new subscriber here😊..my question is based on unlevered free cash flow I learned from your uploaded video..do you you subtract nonrecurring items from the figure you get after calculating (Nopat +D&A-Capex adjustment of deferred tax and change in working capital) coz i heard you say you shouldn't include non recurring in unlevered free cash flow but nopat has the non recurring items due to (ebit(1-tax)) due tu ebit adding back non recurring items during its calculation..i will appreciate for your reply ,I am totally new to accounting and finance 😢

[@financialmodeling]

If you add back non-recurring items in the EBIT calculation (for use in any metric), you do not need to add them back again or adjust for anything in UFCF. The non-cash adjustments in UFCF are only for items that have been deducted to calculate EBIT in the first place.

[@nathanmietlicki752]

When talking about lease liabilities, is it only operating lease or also finance lease ?

[@financialmodeling]

It is best to treat them the same way and either 1) Add both to Invested Capital (and add back the full Rental Expense to EBIT) or 2) Do not add either one to invested Capital one and keep the full Rental Expense deducted in EBIT. Unfortunately, many companies do not provide the required information to do this, or they classify their own lease liabilities inconsistently. But Finance Leases tend to be quite small for most companies, so this is usually not a big deal.

[@nathanmietlicki752]

@@financialmodeling Understood, many thanks ! Would be very interesting to do a quick video on ROCE also.

[@vidya014]

Gearing Weighted ROE = ROIC

[@MichaelHolder24]

You should subtract cash in your denominator, if your numerator is EBIT based (i.e. before any non-operating income from cash balances). And you are also trying to understand the return that the company generates on its invested capital. Cash is not invested.

[@financialmodeling]

This sounds nice/correct in theory, but in practice, you will get very skewed/strange/non-comparable numbers if you apply it to real companies. Look at the comparison for Target and Best Buy when Cash is deducted - the numbers are almost nonsensical for Best Buy.

[@vidya014]

We shouldn't.