Very good article. One question, how would you calculate the invested capital? because there are many different formulas and it can even be confused with the ROCE sometimes.
Thanks for the compliment! Glad you have enjoyed the article.
With regard to your question about ROIC. Agree with you that there is a lot of confusion about what should be included/excluded in the calculation. My practical approach is to follow the financing approach (liabilities side) and I include basically equity + interest bearing debt (long & short-term) + operating lease liabilities (long & short-term) + deferred taxes.
It is true that this calculation might include funding that it might not be being used for productive uses, but it is much more easy to calculate (for a non-insider) than the operating approach (i.e. asset side).
Anyway, to be honest, more than calculating the exact number, for me it is much more relevant the following:
1) That the number, even with a rough calculation, is clearly above WACC
2) Its comparison with peers (using the same calculation formula)
3) Its evolution over time.
I will focus on these issues instead of looking for the perfect formula.
Very good article. One question, how would you calculate the invested capital? because there are many different formulas and it can even be confused with the ROCE sometimes.
Thanks for the compliment! Glad you have enjoyed the article.
With regard to your question about ROIC. Agree with you that there is a lot of confusion about what should be included/excluded in the calculation. My practical approach is to follow the financing approach (liabilities side) and I include basically equity + interest bearing debt (long & short-term) + operating lease liabilities (long & short-term) + deferred taxes.
It is true that this calculation might include funding that it might not be being used for productive uses, but it is much more easy to calculate (for a non-insider) than the operating approach (i.e. asset side).
Anyway, to be honest, more than calculating the exact number, for me it is much more relevant the following:
1) That the number, even with a rough calculation, is clearly above WACC
2) Its comparison with peers (using the same calculation formula)
3) Its evolution over time.
I will focus on these issues instead of looking for the perfect formula.
Saludos!
Thanks for the response!
I call ROCE to the financing approach (liabilities), but as you say, it is easier to calculate, but I like the tips at the end. Thank you so much
Roic
= Gross Profit/Assets × Net Profit/Gross Profit × Assets/Sales × Sales/Invested Capital