Going From Financial Goals to a Financial Plan
The process of financial planning is a bit more organized compared to the traditional saving and investing approach. During financial planning, a comprehensive plan is created in such a way that the needs and goals of the individual are met at each stage. Hence, the financial plan of every individual is unique since it is […]
Types of Coupon Rates in Fixed Income Securities
Fixed income securities are important to investors’ portfolios since they provide regular income in the form of coupon payments. However, there are many different types of bonds available in the market which offer different types of coupon payments. It is important for investors to realize these different types of coupon payments since they can have […]
Exchange Traded Derivatives
Now since we have a basic idea regarding what derivatives really are and the function that they perform, it time to get into a little more detail. At this point, it is essential to introduce the concept of exchange traded derivatives and over the counter derivatives. We have briefly brushed on them in the previous […]
Pension Funds and Systemic Risks
Systemic risks received a lot of media attention after the 2008 financial crisis. The world realized that the failure of one financial institution may not remain restricted to the same financial institution. Instead, such a failure can potentially spiral out of control and impact the entire financial system. Up until now, the idea of systemic […]
Financial Planning – Definition, Objectives and Importance
Definition of Financial Planning Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise. Objectives of Financial Planning Financial Planning has got many objectives to look forward to: Determining capital requirements- […]
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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