Attention valuation fans: we have a new report out today on return on invested capital (ROIC). It updates and extends work from 2014.
morganstanley.com
morganstanley.com
2/ We discuss how to calculate ROIC and explain how it is connected to free cash flow, economic profit, and growth. There have been numerous accounting changes in recent years that need to factor into the calculation.
3/ We work through some of the practical challenges in estimating it properly, including dealing with cash, restructuring charges, and stock buybacks.
4/ The report shares empirical data, including the distribution of ROICs and economic profit for the Russell 3000, a look at how ROICs have changed over time, and the dispersion of ROIC by industry
5/ We review how the introduction of intangible investments can reshape the figures. ROICs for high-return businesses tend to go down and ROICs for low-return businesses tend to go up.
6/ These ideas are illuminated through a case study. We also show how ROIC can guide strategic analysis and finish with a description of ROICβs shortcomings (e.g., it's not good for M&A).
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