Return On Invested Capital (ROIC) | Everything You Need To Know
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- Опубликовано: 28 авг 2024
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This video explains everything about the Return On Invested Capital (ROIC) which is a great indicator to assess the effectiveness of management at reinvesting profits to grow the future profits of the business.
The ROIC is a measure of how skilful management is at making decisions on behalf of the shareholders (us). So I explain what the core philosophy is, what the formula is, how to calculate it using my spreadsheet (its free and available for download via the link below) and most importantly what to look for and how to interpret the data.
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Disclaimer:
The information in this video is general information only and should not be taken as constituting professional advice from Hamish Hodder.
Hamish Hodder is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances.
Hamish Hodder is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this video.
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I've learned this lesson in the most expensive way possible with all my money in portfolio loosing 90% of it by keeping a single investment in a stock with declining ROIC trend !!!!
I like this method, Its very logical indeed. It would be nice then to compare companies in similar industries to find the best companies. Great video as always Hamish with more useful technical stuff. Thanks again mate.
One of the most important videos I have seen mate well done
I can't believe I've never seen this website! This website is amazing!!! Thank you for all that you do!!
Amazing mate. Love your work. Keep it up!!!
Way to go Hamish……. You’re helping a lot of people !!!
THANK YOU. So many websites describe invested capital as = debt to invest + shares issued to raise cash to invest. But in that case if a business used its own profits to grow the ROIC numerator would grow over time but the denominator would be fixed if no new shares issued or debt taken. ROIC goes to infinity. You are the only one saying it’s SHAREHOLDER EQUITY which will change over time as the company accumulates assets bought with profits. So both the numerator and denominator will progress together and ROIC might remain somewhat stable relationship over time. (Am I getting this mostly right????)))))!!! I am subscribing thanks this is very useful. Seems like this is close to RoE except factors in if company needs lots of debt???
Thanks for your video Hamish
Another awesome video! I really like when you break down exactly what is going on in the spreadsheet, it's helped me to actually analyze the company. Thank you!!!
Such a clear explanation
Good job!
As a person trying to better my tools and learn valuations you're videos are awesome. I'd love to see different videos on different aspects of dcf valuation.
You’re great at explaining things. Thanks for the video
Thanks for the video, I would really appreciate if you can make a video of doing the comparison between ROIC vs ROCE. I am a beginner & come across these two ratios & getting difficult to grasp these two concepts.
wow thanks a lot bro. You opened my eyes to some stuff that I was wondering to know and now I understand it! Good explanation!!! With this, I can see how management is effective.
Good extension on ROIC!
Very helpful video!! Hamish could you please make more videos like that, explaining in details how to interprete the financial ratios, evulate debt, etc.. like technical videos. Thanks again for your amazing work!!!
Hamish you should really do an analysis of Foot Locker. I think the business has great prospects in the future, and i have now analysed it with a variety of calculation methods, all of them very conservative estimates and i think the business represents very good value at the current levels its trading at
btw love ur vids keep 'em coming
There are some other return metrics such as return on assets, return on equity, return on capital employed , return on tangible assets and return on invested capital. It would be good to understand the difference between all of these, particularly how ROIC differs from ROCE
Hi Raj, you beat me out of the gate on your questions but I am sure Hamish will cover these aspects and differences as he develops his site.
Great explanation! Thank you!
what's the difference of using FCFO rather than NOPAT?
Do you think ROIC is a better metric than ROE or ROA?
Could you explain the diffrence between ROIC vs. ROCE. And wich one is the better one?
I'm struggling to understand the denominator as a whole. If shareholder's equity is the amount shareholders would gain if a company liquidated everything and accounted for debts (ie. assets - liabilities), then why are they adding back LT Debt to Equity? Maybe I just don't understand equity very well.... Why is Equity considered what the company is investing back into the business, Hamish? Great content by the way.
That’s because, we also have to count debt providers. Both debt owners and equity holders invest capital , and the business uses the capital from both, so for ROIC, we have to assume we are calculating for the whole business and not just shareholders. Debt is also an investment (like bonds).
Why not using the free cash flow? Isn't it easier to find and more conservative? If we use consistently we can compare the Roic between companies of the same sector easily
Hi Hamish thank you for your insight be the why I love how clear you speak FANTASTIC Also I noticed someone asked about looking into CREDIT CORP also APX pls. Thank you
nice video
(NOPAT x (1-tax rate) / Invested Capital.
NOPAT is not owners earnings
Invested capital includes ST debt, net working capital as well, not only LT debt
Reckon you could tell us your current positions?
to get ROIC you divide net operating profit after tax (NOPAT) by invested capital, your numbers are a bit higher than they were those years
How do you calculate the invested capital? And from start of year or end of year?
First of all, thanks for the great content. I found it very interesting especially the final calculations to know about the use of money by management. It would be interesting to have a video with more details about it, about the different ways that they can present themselves for example. Evaluating a particular company, after the accounts in the roic tab, I arrived at the following nnumbers (millions)
CF4O: 10487.2
LT DEBT: 9060
EQUITY: 95
CAPITAL: 9155
What would be your feeling's on that?
Thanks
Hey Hamish, Please do a video on whether Berkshire Hathaway is a buy?
Hi Hamish, thank you for all the amazing videos. I have learnt a lot from you.
I have a question about the end of the video, I could not quite understand the logic of comparing the growth of equity (2019-2011 equity) to the SUM of all cash flows to understand how much of the capital is being deployed to reinvest in the business. I understand the sum shows us the amount of cash flow the business generated but shouldn't we compare it to the sum of equity?
Could you explain it a bit more or alternatively direct to me a source that explains it more thoroughly?
Thanks a lot for the information and help!
Very useful, thank you.
Is ROIC the same as "Investing Cash Flow"
You have two video's explaining ROIC except you're using different formula's for each.. Your older video on the subject calculates ROIC by the formula NOPAT/Invested Capital, Invested Capital defined by Equity + Debt - Non operating assets.
This video calculates ROIC by using the formula CF40/Invested Capital, with the definition of Invested Capital changing to Equity + Long Term Debt
I can only assume that you have refined how you calculate ROIC as you have mentioned that there are multiple ways to calculate ROIC.
Great video Hamish! Well explained and easy to follow. I now understand how to calculate it but I'm wondering if there is any good website where you can find the 1, 5 and 10 year ROIC? I.e. already calculated
Morningstar?
Just curious Hamish, how come you don't use net tangible equity?
Which is better? High roic + slow growth vs lower roic + higher growth
Everyday I hang out with all of medical sales people don't mess with your health thks❤❤🎉🎉
Can you discuss the “event” happening at the moment with the corona virus???
RUclips would de-monitize the video.
Hi Hamish, how do you utilise and compare the 10-year sum of CF4O against the 10-year difference in Capital? Is there some link to the two data points?
Thanks Hamish for the Video, I have a question, if there are treasury stocks on balance sheet which represents stock buy backs, shall we add it to the value of the total equity to calculate accurately the ROIC ?
Is it possible for the equity to be higher than the CF40??
Hi Hamish! You took Equity while calcuating Invested Capital but aren't the profits being added to Retained Earnings rather than the Equity? And hence shouldn't Retained Earnings also be included while calculating the Invested Capital?
Great Video btw. Thanks
Retained earnings are a part of equity for your information.
Equity consists of two line items usually:
1. Capital raised
2. Retained Earnings
Are there circumstances in which you would tolerate lower ROIC or cash flow for owners? Say for example you were thinking of investing in a market leader in a fledgling industry that is yet to prove itself. Would there be anything that would overpower those less than ideal financials?
If the price is cheap relative to cash flow, good cash flow/financials might mean that it is a good business but if price paid is too high then its a bad investment.
Great video, but there's a mistake in explaining the ROIC philosophy.
It's not only measuring how successful and consistent a company is at reinvesting its profits. Well, not only *profits*. But any money it gets. Even if it issues more shares to raise money. Or take more loans. It will still generate more profits.
In other words, it's a profit machine.
fixed assets and cash in the denominator
Very good video... wondered if you would be interested to exchange some thoughts about different calculation / analyse methods. Additionaly I have a spread sheet myself, which might be interesting for you. Is there any way to contact you about this ?
This seems more like FCF Yield than ROIC.
1:33 Start
Its Equity, not shareholder equity... this is wrong
I think you explained the technical side of ROIC but not why it suggests the management is competent with the money it accumulates. For example a low ROIC is caused by the company taking a lot of debt ( making the denominator bigger) but not growing cf4o ( keeping the numerator the same) this lowering the ROIC. Otherwise great content, not shilling shit companies or awful investments right now like Tesla 'cough' FE 'cough' and overall real value
You are talking on CROIC.
Quick fs is not completely free they ask for card
They have a paid plan or a free plan. Just use the free plan :)
So you use a slight variant of Cash Return on Invested Capital (CROIC) rather than ROIC.
BRO....YOU TALK TO DAMN MUCH, GET TO THE DAMN POINT
Thanks for your video Hamish
Thanks for your video Hamish