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.

 
Most Helpful

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

 

Voluptas qui laudantium et id maxime ut aspernatur enim. Rem voluptatum vel quibusdam quia aut ea a totam.

Distinctio corrupti dicta corrupti earum nisi quisquam. Totam adipisci adipisci sed. Sit corrupti doloribus et aut ducimus. Quidem eligendi similique soluta et.

Qui porro fugiat magnam totam quod ut. Amet quis fugiat voluptate eum eum est. Esse vel sunt et doloremque quod dignissimos qui. Quibusdam sunt quod placeat ullam.

Quidem quidem ut neque nostrum blanditiis. Ut fuga aliquam sed et iure qui et. Ipsa iste vitae libero exercitationem et soluta. Voluptates voluptatem et veniam eos.

Career Advancement Opportunities

April 2024 Hedge Fund

  • Point72 98.9%
  • D.E. Shaw 97.9%
  • Citadel Investment Group 96.8%
  • Magnetar Capital 95.8%
  • AQR Capital Management 94.7%

Overall Employee Satisfaction

April 2024 Hedge Fund

  • Magnetar Capital 98.9%
  • D.E. Shaw 97.8%
  • Blackstone Group 96.8%
  • Two Sigma Investments 95.7%
  • Citadel Investment Group 94.6%

Professional Growth Opportunities

April 2024 Hedge Fund

  • AQR Capital Management 99.0%
  • Point72 97.9%
  • D.E. Shaw 96.9%
  • Magnetar Capital 95.8%
  • Citadel Investment Group 94.8%

Total Avg Compensation

April 2024 Hedge Fund

  • Portfolio Manager (9) $1,648
  • Vice President (23) $474
  • Director/MD (12) $423
  • NA (6) $322
  • 3rd+ Year Associate (24) $287
  • Manager (4) $282
  • Engineer/Quant (71) $274
  • 2nd Year Associate (30) $251
  • 1st Year Associate (73) $190
  • Analysts (225) $179
  • Intern/Summer Associate (22) $131
  • Junior Trader (5) $102
  • Intern/Summer Analyst (250) $85
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
dosk17's picture
dosk17
98.9
6
GameTheory's picture
GameTheory
98.9
7
CompBanker's picture
CompBanker
98.9
8
kanon's picture
kanon
98.9
9
bolo up's picture
bolo up
98.8
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”