Difference between ROC and ROIC?
I am really confused about the difference between ROC and ROIC. Are they the same thing? What is the formula for the two?
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I’m sure they can potentially mean different things, however it’s most common to see ROIC or ROE used in IBD. In this case, I would assume ROIC = ROC.
ROIC = NOPAT / Total Invested Capital (Avg. Debt + Avg. Book Equity). Demonstrates returns on a capital structure neutral basis to both shareholders and stakeholders.
ROE = NPAT / Avg. Book Equity. Demonstrates returns on equity, therefore can be distorted by decisions made on financing.
Just like EV-multiples, people generally favour ROIC given it is capital structure neutral and therefore is easy to use to benchmark across the peer group.
Doesn’t roic use net debt? So average debt - average cash + average shareholders equity? What are some advantages/disadvantages of using net debt vs just debt
Also doesn’t roe use net income since this is after interest expense has been paid off to debt holders?
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