1/12 Today's short thread will cover ROIC or return on invested capital and one of the ways I like to calculate the ratio.
We will look at the formula, and inputs and briefly discuss why. Keep in mind there are a gozillion ways to determine ROIC, this is my fav.
🧵⬇️
We will look at the formula, and inputs and briefly discuss why. Keep in mind there are a gozillion ways to determine ROIC, this is my fav.
🧵⬇️
2/12 "A company creates value when the present value of the cash flows from its investments are greater than the cost of the investments. In other words, one dollar invested in the business becomes worth more than one dollar in the market."
Michael Mauboussin
Michael Mauboussin
3/12 ROIC helps investors measure how effectively management reinvests the one dollar to grow beyond the initial investment. As with many metrics, the higher the better, and the longer the better.
It is one way to measure how well mgmt effectively allocates capital.
It is one way to measure how well mgmt effectively allocates capital.
4/12 Show how do we calculate it?
ROIC = NOPAT ÷ Invested Capital
Where:
💸NOPAT = Net operating profit after taxes
💵Invested Capital = The net assets necessary to generate the NOPAT
ROIC = NOPAT ÷ Invested Capital
Where:
💸NOPAT = Net operating profit after taxes
💵Invested Capital = The net assets necessary to generate the NOPAT
5/12 Let's unpack NOPAT first, simplified.
NOPAT = EBIT x (1 - tax rate)
We can find both inputs on $MSFT's income statement, with EBIT also equaling operating income.
EBIT = $83,383 million
Tax rate = 13.1%
$COST NOPAT = 83,383 x (1-13.1%) = $72,459
Easy, now the fun part
NOPAT = EBIT x (1 - tax rate)
We can find both inputs on $MSFT's income statement, with EBIT also equaling operating income.
EBIT = $83,383 million
Tax rate = 13.1%
$COST NOPAT = 83,383 x (1-13.1%) = $72,459
Easy, now the fun part
6/12 Now invested capital.
A word first, we have several ways to go about calculating invested capital. We can approach from the operating side or the financing side. Each has its benefits, I like operating because it forces me to look deeper into operations.
Each to their own.
A word first, we have several ways to go about calculating invested capital. We can approach from the operating side or the financing side. Each has its benefits, I like operating because it forces me to look deeper into operations.
Each to their own.
7/12 Invested capital from an operations approach.
Current assets
- Non-interest bearing currrent liabilities
= Net working capital
+ Net PP&E
+ Acquired Intangibles
+ Goodwill
+ Other assets
All of which gives us Invested capital.
Current assets
- Non-interest bearing currrent liabilities
= Net working capital
+ Net PP&E
+ Acquired Intangibles
+ Goodwill
+ Other assets
All of which gives us Invested capital.
8/12 We can find all of this on the balance sheet:
Net Working capital first
+Accounts receivable - $44,261
+Inventory - $3,742
+Other current assets - $16,924
= Current assets of $64,927
Net Working capital first
+Accounts receivable - $44,261
+Inventory - $3,742
+Other current assets - $16,924
= Current assets of $64,927
9/12 Now current liabilities:
+Accounts payable - $19,000
+Accrued comp - $10,661
+Short-term income taxes - $4,067
+Short-term unearned rev - $43,538
+Other current liabilities - $13,067
= Current liabilities of $90,333
Net working capital = 64,927-90,333 = -25,406
+Accounts payable - $19,000
+Accrued comp - $10,661
+Short-term income taxes - $4,067
+Short-term unearned rev - $43,538
+Other current liabilities - $13,067
= Current liabilities of $90,333
Net working capital = 64,927-90,333 = -25,406
10/12 Then we take the net working capital and add the other inputs:
+Net working capital = -25,406
+Net PP&E - 74,398
+Goodwill - 67,524
+Intangibles - 11,298
+Other assets - 21,897
Total Invested Captial = $148,711
+Net working capital = -25,406
+Net PP&E - 74,398
+Goodwill - 67,524
+Intangibles - 11,298
+Other assets - 21,897
Total Invested Captial = $148,711
11/12 Now we can put it all together to determine $MSFT ROIC
NOPAT = $72,459
Invested Capital = $148,711
ROIC = $72,459 ÷ $148,711 = 48.7%
NOPAT = $72,459
Invested Capital = $148,711
ROIC = $72,459 ÷ $148,711 = 48.7%
12/12 If you want to dig deeper into ROIC I strongly suggest you check out the below article, Mauboussin explains it in such a easy to read insightful way.
morganstanley.com
Next week we will look at some other options to calculate ROIC
Hope this helps!
morganstanley.com
Next week we will look at some other options to calculate ROIC
Hope this helps!
We help decode complex language.
Our FCF Yield ebook can help you learn this valuable metric to find great potential investments.
Want free access?
Get it here: einvestingforbeginners.ck.page
Our FCF Yield ebook can help you learn this valuable metric to find great potential investments.
Want free access?
Get it here: einvestingforbeginners.ck.page
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