How does DIP Financing work?
In the business world, Cash is King. Companies that do not have adequate cash cannot survive for very long. This is because of the fact that employees, vendors, tax authorities, and other creditors expect to be paid in order for the business to remain in operation. When a company is not facing bankruptcy, it obtains […]
Portfolio Revision – Meaning, its Need and Strategies
What is a Portfolio ? A combination of various investment products like bonds, shares, securities, mutual funds and so on is called a portfolio. In the current scenario, individuals hire well trained and experienced portfolio managers who as per the client’s risk taking capability combine various investment products and create a customized portfolio for guaranteed […]
Prospect Theory
Prospect Theory is probably the most important piece of literature in behavioral finance. The conclusions made in prospect theory underlie a lot of aversions and biases, which have been discussed in different articles. Hence, in order to understand all those biases and the behavioral finance theory in general, it is important to understand what the […]
Why Do Sponsors Fund Teams in Sports Leagues?
In the previous articles, we have already seen that the sponsorship of sports teams can happen at multiple levels. We have also seen how the sponsoring of individual athletes works and how it provides benefits to the sponsor as well as the athlete. It is important to note that sponsorship can happen at levels which […]
Quick Ratio – Meaning, Formula and Assumptions
The quick ratio is a variation of the current ratio. However, a quick ratio is considered by many to be a more conservative estimate than the current ratio. This characteristic fetches it the nickname of being the “Acid test ratio”. The difference between the current ratio and the quick ratio is the fact that quick […]
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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