Intrinsic Value and Mispricing
The whole objective of equity valuation is to find mispriced securities. Investors can make abnormal profits when they find securities which are lower than their intrinsic worth trading in the market. However, the concept of mispricing and intrinsic value is misunderstood to say the least. What the average person considers as mispricing is at best […]
Commercial Banks and Branch Banking
The business model behind commercial banking practice has completely changed over the years. Earlier, commercial banks were heavily dependent upon branch banking. Branches that served corporate customers were thought of as being an asset. As a result, it was common for corporate banks to advertise these branches to prospective clients. However, over the years, the […]
How Risk-Based Supervision System Works?
In the previous article, we have already studied what risk-based supervision is. We now know why regulatory bodies all across the world are adopting the risk-based supervision system and what its benefits are. However, it is also important to understand the manner in which a risk-based supervision system can be implemented. The details of the […]
Revenue From Releasing Players for International Tournaments
Professional sports athletes play for certain sports franchises throughout the year. However, these same players also represent their nation when it comes to international events. One good example would be the FIFA World Cup. It needs to be understood that all good players such as Lionel Messi and Cristiano Ronaldo play for their respective countries. […]
Risks Involved in Derivative Contracts
Derivatives are considered to be extremely risky. The market is divided in two fronts when it comes to the opinion about risks involved in a derivative contract. Some people are of the opinion that since derivatives are not new securities by themselves, how can they introduce new risk in the market? The opposing camp agrees […]
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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