Comparing ROIC to Other Invested Capital Ratios

Introduction

Return on Invested Capital (ROIC) is one of the most important indicators used to assess the performance of a company or financial product. It measures the return the company generates on its invested capital and gives creditors and investors an insight into the potential success of their investments. ROIC is calculated by dividing the company’s net income by its total capital.

Other invested capital ratios play a supporting role in evaluating the success of an investment.

Important Invested Capital Ratios

• Return on Equity (ROE)
• Return on Assets (ROA)
• Earnings per Share (EPS)
• Debt to Equity Ratio (D/E)
• Operating Cash Flow to Debt Ratio (OCF/D)

In this post, we will look into the differences and similarities between ROIC and other invested capital ratios. We’ll compare their calculation methods, significance and usage in order to understand how they can be used to compare financial products.

Return on Invested Capital (ROIC)

Return on Invested Capital (ROIC) is a key financial ratio used to compare different companies in order to evaluate their efficiency in generating a return on investment. It is an important metric used to gauge how effectively the company is generating a return on its investments and how effectively it is using its capital.

Definition

Returns on Invested Capital (ROIC) is a financial ratio calculated by dividing a company’s after-tax operating profit by its total invested capital. Invested capital includes equity, debt, and other sources of financing. The higher the ROIC, the better the company is performing in terms of utilizing invested capital to generate profits.

Calculation

ROIC is calculated by taking the company’s after-tax operating profit divided by its invested capital. Invested capital includes equity, debt, and other sources of financing. The formula for this calculation is as follows:

• ROIC = After-Tax Operating Profit / Invested Capital

Benefits for investors

ROIC is a useful financial metric for investors to consider when evaluating a company’s performance. It provides information on how well the company is generating a return on investment. By taking into account the company’s invested capital, ROIC gives investors a more comprehensive view of a company’s overall financial performance. Additionally, by comparing a company's ROIC to those of its peers, investors can determine how effectively a company is generating returns relative to its competitors.

Price-to-Book Ratio (P/B Ratio)

Definition

The Price-to-Book ratio (P/B Ratio) compares a company’s market value to its book value. It is calculated by dividing the stock's market capitalization by the book value of equity (without any liabilities). In other words, the P/B ratio is a measure of a company’s stock price compared to the value of its assets.

Calculation

The formula to calculate the P/B ratio is:

• Price-to-Book Ratio (P/B Ratio) = Market Capitalization/Book Value of Equity

Benefits for Investors

The P/B ratio is a useful tool for investors to assess how much they are paying for each dollar of a company’s book value. A company with a higher P/B ratio may be seen as having potential for growth, while a company with a low P/B ratio may be seen as being undervalued. Additionally, P/B ratio can be used to compare companies within the same industry. If a company is trading at a higher P/B ratio than its peers, it may indicate that it is more attractive as an investment. On the other hand, if a company is trading at a lower P/B ratio than its peers, it may indicate that it is undervalued and a good potential buy.

Earnings Yield Ratio (EYR)

The Earnings Yield Ratio (EYR) is a measure of how much return an investor receives for every dollar invested in a company’s stock. It is calculated by dividing a company’s earnings by the current market price of its stock. This is a useful tool when comparing the return generated from different investments over the same period of time, making it an important ratio for investors to consider when making investment decisions.

Definition

The Earnings Yield Ratio is a measure of return on invested capital that compares a company’s net income to its current stock price. It is expressed as a percentage and indicates how much in returns the stock will provide per dollar of investment. It is calculated by dividing a company’s net income by the current price of its stock.

Calculation

The Earnings Yield Ratio can be calculated by dividing a company’s net income by its current stock price. For example, a company’s net income is $100 million and its current share price is $20. The Earnings Yield Ratio is calculated by dividing $100 million by $20, which gives you a ratio of 5%. This implies that, for every dollar invested in the stock, the investor would receive a return of 5%.

Benefits for investors

The Earnings Yield Ratio is an important ratio to consider when making investing decisions and can help investors compare the return they receive on their investments over different time periods. It is also useful in comparing investments within the same sector, as it takes into account both a company’s stock price and its earnings. Additionally, it is a simple calculation, requiring only a few inputs and can be used to quickly assess the return available from a particular stock.

• The Earnings Yield Ratio is a measure of return on invested capital that compares a company’s net income to its current stock price.
• It is expressed as a percentage and indicates how much in returns the stock will provide per dollar of investment.
• The Earnings Yield Ratio is useful when comparing the return generated from different investments over the same period of time.
• It is also useful in comparing investments within the same sector, as it takes into account both a company’s stock price and its earnings.

5 Capitalization Rate

Definition

The capitalization rate is a measure of the expected return on an investment in a specific asset, expressed as a percentage of the current market price of the asset. The capitalization rate can be used to compare different investments and to estimate their potential return.

Calculation

To calculate the capitalization rate, divide the expected future cash flows from an investment in a specific asset by the current market price of the asset. For example, if the future cash flows from an investment in a specific asset are expected to be $10,000, and the current market price of the asset is $100,000, then the capitalization rate would be 10%, or ($10,000/$100,000).

Benefits for Investors

The capitalization rate can be used to compare different investments and to estimate their potential return. The higher the capitalization rate, the higher the expected return on investment, and the better the investment opportunity for the investor. This measure can also be used to compare investments that have different levels of risk, as higher risk investments typically have higher expected returns.

Cash Return on Invested Capital (CROIC)

Cash return on invested capital (CROIC) is one of the most important measures of financial performance, widely accepted by investors and used to measure the amount of return earned on an investment. It is also sometimes referred to as Return on Invested Capital (ROIC).

Definition

The CROIC is defined as the amount of cash generated, divided by the total capital invested in the business. It measures the return that is generated from every dollar of capital invested in the business. The higher the ratio, the more value that can be created for investors.

Calculation

The CROIC is calculated by dividing cash generated by the total capital invested in the business. It is typically expressed as a percentage. The formula for CROIC is:

• CROIC = (cash generated) ÷ (total capital invested)

Benefits for Investors

CROIC is a useful measure for investors because it allows them to see how much return they are getting from the capital they have invested in a business. It is especially beneficial for investors to consider this ratio when comparing different investments, since it provides a more accurate picture of the returns that can be generated from each one. This metric can also be used to monitor the performance of a business over time, allowing investors to make informed decisions about when to buy or sell based on its performance.

Conclusion

Return on Investment Capital (ROIC) is one of many metrics that investors use to measure the performance of an investment. Comparing different capital ratios provides investors with a more comprehensive understanding of a company's financial health and prospects. This can be a valuable source of knowledge to inform successful investment strategies.

A comparison of ROIC to other invested capital ratios was conducted in this blog. Looking at Price/Book (P/B) Ratio and Price to Earnings (P/E) Ratio, it is clear that while these ratios provide important signals to investors, ROIC may be a more comprehensive and useful measure. ROIC allows investors to measure returns of capital based not only on current market values, but also on the returns that a company might earn in the future.

In addition, by comparing ROIC to other invested capital ratios, such as the Debt/Equity (D/E) Ratio, it can be seen that ROIC offers a clearer assessment of returns on investments which have been financed with debt and equity. This allows investors to make informed decisions on companies which have a higher debt burden.

Summary

In conclusion, ROIC provides a more comprehensive assessment of an investment's returns compared to alternative ratios. ROIC takes into account current market values, future earnings potential, and the D/E ratio, which allows investors to make more informed decisions when assessing investments.

Final Thoughts

Investors should not limit their analysis to any single capital ratio, as this may give an incomplete assessment. However, ROIC should be considered an important tool in the investor's toolbox, as it offers greater insight into returns on invested capital.