Chapter 2: Ratio Analysis
Lecture 2.7: Return on the Invested Capital
• Raw materials • Land and Buildings
• Salaries • Vehicles
• Taxes • Patents
• Utilities Bill • Licenses
• Rents • Inventories
COSTS - OPEX ASSETS - CAPEX
Recorded on the income statement Recorded on the balance sheet
Measured by profitability margins Measured by turnover/ ROA
To constant levels of sales:
Changes in the operational margin come from changes in the cost structure of companies
Changes in the asset turnover come from changes in the investments of companies
The difference between investment and costs is highly relevant from an accounting point of view
but, in practice, in terms of value, they are two sides of the same coin – both contribute to a
lower or higher cash flow for the company
These two elements should therefore always be part of an analysis of any company and should
always accompany the analysis of sales – conclusions should not be drawn just from looking at
one of them
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑹𝒆𝒔𝒖𝒍𝒕
𝑹𝑶𝑰𝑪𝑻 =
𝑰𝒏𝒗𝒆𝒔𝒕𝒆𝒅 𝑪𝒂𝒑𝒊𝒕𝒂𝒍
• ROIC can be calculated for the firm as a whole, for the core business, for different business units, for
the non core business, for different types of non core businesses, etc.
Income Statement Balance Sheet
CORE RESULT
Core Business Core Result CORE INVESTED DEBT
= CAPITAL
ROIC Invested Capital Core Business
NON CORE RESULT
FINANCIAL RESULT NON CORE EQUITY
INVESTED CAPITAL
• Most people agree that ROIC should be calculated with some sort of lag, following the idea that it
takes a while for investments made to yield any results
• While it’s always arguable how long is good enough, generally this period is assumed to be one year
• Another common approach is to average out the invested capital of the last 2 periods
• Some simply calculate it with the invested capital of the current period – less common
𝑹𝒆𝒔𝒖𝒍𝒕𝑻
𝑹𝑶𝑰𝑪𝑻 =
𝑰𝒏𝒗𝒆𝒔𝒕𝒆𝒅 𝑪𝒂𝒑𝒊𝒕𝒂𝒍𝑻−𝟏
𝐶𝑜𝑟𝑒 𝑅𝑒𝑠𝑢𝑙𝑡
𝐶𝑜𝑟𝑒 𝑅𝑂𝐼𝐶 = =
𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑜𝑟𝑒 𝐵𝑢𝑠𝑖𝑛𝑒𝑠𝑠
𝐶𝑜𝑟𝑒 𝑅𝑒𝑠𝑢𝑙𝑡 𝑆𝑎𝑙𝑒𝑠
𝐶𝑜𝑟𝑒 𝑅𝑂𝐼𝐶 = × =
𝑆𝑎𝑙𝑒𝑠 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑜𝑟𝑒 𝐵𝑢𝑠𝑖𝑛𝑒𝑠𝑠
𝑪𝒐𝒓𝒆 𝑹𝑶𝑰𝑪 = 𝑪𝒐𝒓𝒆 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑴𝒂𝒓𝒈𝒊𝒏 × 𝑪𝒐𝒓𝒆 𝑨𝒔𝒔𝒆𝒕𝒔 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓
𝑪𝒐𝒓𝒆 𝑹𝑶𝑰𝑪 = 𝐶𝑜𝑟𝑒 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑀𝑎𝑟𝑔𝑖𝑛 × 𝐶𝑜𝑟𝑒 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝑪𝑶𝑮𝑺 𝑺𝑮&𝑨 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑻𝒂𝒙𝒆𝒔
𝟏− − − − −⋯ 𝒙
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆
𝟏
( )
𝑷𝑷&𝑬 𝑮𝒐𝒐𝒅𝒘𝒊𝒍𝒍 𝑰𝒏𝒕𝒂𝒏𝒈𝒊𝒃𝒍𝒆𝒔 "𝑵𝒆𝒕 𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍"
+ + + +⋯
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆
Revenues 24 662 4 146
Gross Margin 10 205 2 419
SG&A 944 319
Depreciation 1 517 172
Taxes 2 487 362
Core Result 5 258 1 284
PP&E and Intangibles 23 118 11 375
Goodwill 2 516 4 675
NWC and Other IC - 2 161 -2 550
Total IC 23 473 13 500
22% ROIC 9% ROIC
𝑪𝒐𝒓𝒆 𝑹𝑶𝑰𝑪 = 𝑪𝒐𝒓𝒆 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑴𝒂𝒓𝒈𝒊𝒏 × 𝑪𝒐𝒓𝒆 𝑨𝒔𝒔𝒆𝒕𝒔 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓
22% 21% 105%
9% 31% 31%
𝑪𝑶𝑮𝑺 𝑺𝑮&𝑨 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑻𝒂𝒙𝒆𝒔
𝑪𝒐𝒓𝒆 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑴𝒂𝒓𝒈𝒊𝒏 = 𝟏 − − − − −⋯
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆
21% 59% 4% 6% 10%
31% 42% 14% 4% 9%
𝟏
𝑪𝒐𝒓𝒆 𝑨𝒔𝒔𝒆𝒕 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑷𝑷&𝑬 + 𝑰𝒏𝒕𝒂𝒏𝒈𝒊𝒃𝒍𝒆𝒔 𝑮𝒐𝒐𝒅𝒘𝒊𝒍𝒍 "NWC" 𝒂𝒏𝒅 𝑶𝒕𝒉𝒆𝒓
+ + +⋯
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑹𝒆𝒗𝒆𝒏𝒖𝒆
105% 94% 10% -9%
31% 275% 110% -60%
