ROIC

ROIC indicates how much profit is generated by the company for every Rs 1 of invested capital.

Formula

       ROIC = Net Operating Profit After Tax/ Invested Capital 

Example

Company ABC has a Net Operating profit of Rs 1000 Cr and a tax rate of 24%. So the NOPAT (Net Operating Profit After Tax) of the company is Rs 240. The Invested capital is Rs 1000 Cr. Then the ROIC is 24%.

For every Rs 1 of invested capital the company generates an Operating Profit of Rs 0.24

How to use practically

The ratio shows how efficiently a company is using the money to generate income. The higher the ratio, the better the company.

The benchmark for ROIC is around 15%. Any company which earns less than 15% is destroying the shareholder’s money and any company which is earning greater than 15% is creating wealth for shareholders.

ROIC is the metric used by management to decide to take any future project or not. If the project is giving higher ROIC, the management would love to execute it, or else they can discard it.

So as an investor, we must be prudently monitoring the trend of ROIC in the company. If the company is consistently showing lower ROIC then we can conclude that the management is not allocating the money properly.

The market doesn’t reward the company with low ROIC. Companies with higher ROIC will trade at a premium valuation than companies with lower ROIC.

ROIC is the single most important parameter which can draw the line between companies which create wealth and which destroy the wealth of the shareholders.

ROIC can be bifurcated into two parts (du point analysis). First – Net profit margin and second- Capital turnover ratio, Investors must track these metrics over the past years to get a better understanding of the company.

ROIC should be seen along with the growth rate of the company to know the best valuation to buy the company.

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *

Article Info

Published Date: November 29, 2021
Author: Valarmurugan

Stock Market Training

3 days classroom training+ 30 days online practice. Here you can learn from basics to advance concept.

Intraday Scanner

We have best in-class intraday scanner which helps you in stock selection. 

Related Terms

Do you like Videos?

We got many concepts been explained in video format. You may like it!

An investment in knowledge pays the best interest.

— Benjamin Franklin

Feel Free to Ask Us

We wish to work more closely with our community. If you want us to share our insight on trading and investing, feel free to as us.

Do you wish to invest in stock market?

Stay Informed with EQSIS Tools and Services

Stock Market Training

3 days classroom training + 30 days online practice. Here you can learn from basics to advance concept.

Intraday Scanner

We have best in-class intraday scanner which helps you in stock selection.

Follow Us

You can joins us using your prefered social network