Have been getting questions on ROIC in interviews and have been trying to understand it better both mechanically and intuitively but feel like I see variety of different posts about it and still have questions... Appreciate if anyone could help confirm a few outstanding Qs I have
- What is the typical time frame investors look at? Is it next 4 quarters NOPAT vs. current invested capital on the balance sheet? Or do people typically look historically
- Does ROIC consider the price of the security at all? Looks like its based on the balance sheet so I think mechanically the answer is no, but if you want to look at ROIC > WACC as a metric to confirm a good investment, where does the price of the stock in the market factor in? Or am I missing something here
- What is the specific formula you all use for invested capital for public companies? Is it simply net debt + shareholder's equity from the latest balance sheet?
At a large cap PE fund. We typically look at ROIC using EBITDA - Maintenance Capex / Capex
You can extrapolate this out and look at NOPAT / Total Capital employed as well for an entire business.
I think the goal should always be to use this as a way to understand unit economics and then from there what do returns look like in a stabilised set up (ie, once you’ve reached scale how good are your unit economics)
Most people call this incremental ROIC or "ROIIC", but they also tend to use incremental EBITDA rather than absolute. Traditionally ROIC = NOPAT / (Net Debt + Common Equity), but there's a ton of individual approaches/variations here.
Michael Mauboussin has done a ton of interesting work on this topic: https://www.morganstanley.com/im/publication/insights/articles/article_…
To op's question: there's a derivation of the DCF formula in McKinsey's valuation that kicked off this whole obsession with ROIC, but using current or projected ROIC depends on whether your investment thesis is that the current business is undervalued or that the business will improve in the future more than its valuation implies. Either way I'm doubtful that ROIC carries much information on its own since it's just a correlate of margins/growth (which is what you really care about) but with the added noise of capital intensity
Thanks so much for the pdf
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