For valuation gurus: ROIC and goodwill
I am trying to wrap my mind around ROIC and am having a tough time figuring out whether to include goodwill. I read through Greenblatt's guide that says no because goodwill does not need to be "replenished" going forward. Damodaran says that to the extent that goodwill is a reflection of the acquirer's belief in the growth assets of the acquiree (i.e. belief in the growth of the company, not necessarily the present condition), goodwill should also not be included. The remainder (synergies, overpayment) should be included. When I think of Damodaran's argument, I then wonder what he thinks about a company issuing equity and boosting its APIC. Does the "invested capital" in that case not also partially reflect the growth assets of the firm? Seems to me like goodwill is something that was paid for and there should be no reason not to include it in ROIC, but it seems like ROIC without intangibles is a more popular measure.
Would greatly appreciate somebody disabusing of my ignorance.
I have no clue either - great question though and I'm eager to hear a response.
Just to clarify Damodaran's "growth assets" point, he argues that because part of the goodwill is premium for higher future returns, the company should not be penalized for not earning those returns in the present (penalty would come by including of goodwill in denominator for ROIC). In my mind, it is similar to why we would not use market values to calculate ROIC. Again, my response to that is that it would seem improper to include APIC and its cash in ROIC when equity is issued and the proceeds the company receives includes expectations from investors linked to "growth assets."
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