Hello,
(deleted my actual post because it was so confusing to read)
I have a question on the Rosenbaum workbook. It states "return on invested capital is calculated as LTM adjusted EBIT divided by the average of total invested capital (sum of debt and shareholders' equity less cash)."
So is this a way of calculating ROIC and is Invested capital another way of saying sum of debt + shareholder equity less cash?
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comon guys share your knowledge with me so I can share it with others
I might just be confusing you further, but I have always used FCF/EV as my ROIC calc.
And for FCF, I just used EBITDA - norm capex.
I think there are a lot of ways to look at this metric, but the essence of it is to figure out how much your capital is earning you on a yearly basis, and how long it would take to make all your money back. There are a lot of different numerator/denominator combinations that serve this purpose.
In the real world there is no answer. Just do whatever makes sense to you, and be consistent in applying it to all potential investments.
I'll take everything I can get man.
Excuse me if I am asking stupid questions..
It is confusing cause Im using data from the investment banking book by Rosenbaum and the data isnt adding up, maybe cause it is not providing me with "norm capex" and such.
Also for some reason they put FCF/EV = FCF yield??
How come your only using EV in the denominator? Wouldnt this mean EV is the firms total capital?
You can use total capital instead: debt + prefs + equity. This punishes businesses who horde cash. This is a variation of the same ratio, and is definitely useful for evaluating businesses or managers who needlessly tie up capital - Apple is a good example.
Again, there are many combinations that serve different purposes. It all depends on what you are trying to do. I would stress again that there is no answer - there's just situational variations.
omg Im such a noob, totally thought EV meant equity. Ok I see now (EBITDA- capex /EV) shows a company's return while neutralizing the company's capital structure.
Total capital which is total debt+ prefs + non controlling interest+ shareholder equity, favors a company with less of its "total capital" in cash (recently stumbled upon total capitalization in the book )
So then invested capital is also a formula ? because the Rosenbaum workbook states "return on invested capital is calculated as LTM adjusted EBIT divided by the average of total invested capital (sum of debt and shareholders' equity less cash)."
Thanks man..
There is no universal definition for this stuff. "Total capital" means different stuff to different people. I view it as (debt + equity + prefs). Its basically all the money that has been put into the business, but hasnt been returned to stakeholders.
The ratio with total capital in the denominator simply favors companies with less total capital, which includes cash. Basically, to maximize this ratio (which is a good thing) the managers must allocate capital very efficiently. They either need to reinvest capital in projects that yield lots of FCF, or they need to use cash for dividends/amort/buybacks to reduce the size of the balance sheet.
The definition of "total invested capital" you used (debt, equity, less cash) is also known as EV. This gives the managers undue credit for hording cash (which is a bad thing). When you subtract cash, call it EV. Dont call it total capital or invested capital, because nobody in the real world will have any idea what you are talking about.
EBIT is kinda the same thing as (EBITDA - capex). They are proxies for one another, but will never be exactly the same. It probably doesnt matter which you use when you are just getting started. I think you will eventually get it.
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