Formula's for (ROIC, Book Value)
Hi,
I am new to the field and have two quick formula's where I always see people use different denominator and numerators to calculate. Could you please let me know which one is the proper way when valuing public companies? As well as where you would find it in the BS.
For example, for ROIC, I saw some people base it off of EBITDA, some of of EBIT and some of off NOPAT. Furthermore, what is the proper invested capital figure and how do you obtain it in the BS? Equity + interest bearing liability?
For Book value as well, how would you calculate it from a BS?
Would be really helpful if you could guide.
For ROIC: there is no one "proper" figure. Different figures mean different things, and have different uses. All ROIC calculations should use some sort of invested capital metric as the denominator. This could uld be PP&E + Net Working Capital or it could be Debt + Book Equity. Generally speaking NOPAT/average(debt + equity) is the most common ROIC figure you'll see around.
Using EBITDA is problematic because it does not adjust for capital intensity, and will likely over-estimate the ROIC of capital intensive businesses, relative to capital light ones. This metric has relatively little use to me, though it's somewhat helpful if D&A is a grossly distorted metric due to acquisitions, write-downs, etc. I would typically then use [EBITDA - Capex - Taxes]/(average capital)] though, in that scenario.
Using EBIT is fine, and can be helpful for comparing the underlying performance of two businesses where one has a much lower tax rate (perhaps because of a history of bankruptcy and thus a large number of loss carryforwards). The drawback of EBIT, as opposed to NOPAT is that using EBIT divorces the underlying relationship between growth in earnings available to the financiers and incremental capital deployed into the business, and thus also makes it less helpful as a metric to judge business quality. Businesses with high tax rates should, all else equal, have higher "EBIT-ROICs" than those in low tax jurisdictions, because the required return on pre-tax capital is higher in a higher tax jurisdiction. Thus "EBIT-ROIC" tells you little about business quality.
When people say "book value" they typically just mean the disclosed shareholder's equity value on the balance sheet. No calculations necessary. But you can also back it out by subtracting total liabilities from total assets. See: (https://en.wikipedia.org/wiki/Accounting_equation
Est fuga eius consequatur itaque. Et voluptatibus consequuntur eum magnam rerum consequatur distinctio. Voluptas necessitatibus expedita quisquam ut nihil dolores et. Consequatur molestiae omnis voluptatem consequuntur odit dolores.
Similique animi dolores aut. Minima ut quia quo debitis magnam reiciendis. Corporis sint officia qui doloremque neque. Natus dolorem quibusdam aliquid eaque. Quam temporibus sunt est accusamus culpa doloribus fuga corporis. Ducimus voluptate omnis ut aut repellat. Et corporis et vero et et quia.
Unde sit facere mollitia ut debitis rem laboriosam. Sunt assumenda aliquam aut officia dolore ea. Quos voluptatibus id fuga ipsam ut eligendi perspiciatis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...