ROIC (return on invested capital) after tax is measured as:
ROIC before tax is measured as:
Profit margin after tax is defined as:
Profit margin before tax is defined as:
The turnover rate of invested capital is defined as:
To avoid the impact of different tax rates across firms, ROIC should be measured before tax when performing a benchmark analysis. Since taxes are an expense for shareholders ROIC should be measured after tax when measuring value creation.
One explanation is a decrease in the profit margin; i.e. operating expenses grow more than revenue.
Another explanation is a decrease in the turnover rate of invested capital; i.e. the utilisation of invested capital relative to revenue.
ROICE itself over time, weighted average cost of capital (WACC) and peers’ ROIC.
Improve revenue (develop better products, increase sales of existing products, entering new markets etc.)
Reduce costs (production, sales, distribution, marketing, administration etc.)
Change the product mix (improve sales on high margin products)
False – it has invested capital 90 days on hand (360/4.0)
Index numbers show the trend in important line items. However, index numbers do not reveal the relative size (importance) of each item. For this purpose, common size analysis is more useful. Common-size analysis scales each item as a percentage of for instance revenue or total assets.
ROIC = Return on invested capital
NBC = Net borrowing cost measured as a percentage
NIBL = Net interest bearing liabilities*
BVE = Book value of equity
The appropriate benchmark is the cost of equity (shareholders’ required rate of return)