Consilient Observer

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octobre 06, 2022

Return on Invested Capital

octobre 06, 2022

Return on Invested Capital

Consilient Observer

Return on Invested Capital

octobre 06, 2022

How to Calculate ROIC and Handle Common Issues

Return on invested capital (ROIC) is a financial metric that can help one assess whether a company is creating value with its investments.
We discuss how to calculate ROIC and explain how it is connected to free cash flow, economic profit, and growth.
We work through some of the practical challenges in estimating it properly, present empirical data, and review how the introduction of intangible investments can reshape the figures.
We illuminate these ideas through a case study, show how ROIC can guide strategic analysis, and describe ROIC’s shortcomings.

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We discuss how to calculate return on invested capital (ROIC) and show how it is connected to free cash flow, economic profit, and growth. We work through the challenges in estimating it, present empirical data, review how adjusting for intangible investments can reshape the figures, and include a case study.

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DEFINITIONS
Free cash flow (FCF) is a measure of financial performance calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.

Return On Invested Capital (ROIC) represents the rate of return a company makes on the cash it invests in its business.

IMPORTANT INFORMATION

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers.

This material is for the benefit of persons whom the Firm reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of the Firm. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It is the responsibility of every person reading this material to fully observe the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country.

This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.

Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.

For the complete content and important disclosures, refer to the article pdf.

Return on Invested Capital