Understanding ROIC
Can someone help me understand ROIC and also how it differs from return on total capital? Is the formula for ROIC supposed to use NOPAT or Net Income (on different websites its showing different results)
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ROIC ratio uses net debt + equity on the denominator and usually EBIT on the numerator. You could use NOPAT if you want though. The key is that you need to use an unlevered earnings metric with ROIC because invested capital includes net debt. Therefore, net income could never be used with ROIC. Always pair unlevered earnings metrics with EV or anything that includes debt and pair levered earnings(like net income) with EqV. Total capital is usually debt+equity instead of the net debt+equity in ROIC.
Ok I was confused because investopedia says to use NOPAT but in the video where it actually calculates ROIC they use Net Income - Dividends. Also, FactSet also uses Net Income in their ROIC calc.
So if I'm calculating ROIC for Microsoft I have (2019): EBIT: $42,959 Eff. Tax Rate: 10.2% NOPAT: $38,585 Book Value Debt (ST + LT Debt): $72,178 BV Cash (Cash + ST Investments): $133,819 BV Equity: $102,330 Total Invested Capital: $40,689 ROIC: 95%
Is this correct? On FactSet it says its ROIC is 22.7% and I'm worried I'm overstating it. However, FactSet uses Net Income and doesn't subtract cash and also adds in Operating Lease Liabilities with the biggest driver here coming from cash (op lease liabilities are rather small)
Unless I'm mistaken, you definitely don't use net income in the ROIC ratio. That wouldn't make sense because if you're looking at the return for all investors(debt and equity), how can you use an earnings metric that's only available to common stockholders? Rosenbaum and Pearl calculates ROIC as EBIT/average net debt+equity. I think NOPAT still works. In this case, net debt would be negative I believe because cash is outweighing the debt. I calculated it with the formula I outlined and got 106%, so you should be right if you're using NOPAT. Hope this helps
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