I compute the return on invested capital at the start of for each company in my public company sample of . Aswath Damodaran said. January 28, at am by Aswath Damodaran . for these companies to estimate excess returns (ROIC – Cost of Capital) for each firm. Return on Capital or Return on Invested Capital (ROIC) is something I . Aswath Damodaran is an NYU professor and the guru of valuation.

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This is a research paper that I randomly came across online.

Margins and ROC

If your focus is on answering the question of whether your company is a “good” or a “bad” company, looking at margins may not help very much. China, the other big market in terms of population, does not seem to offer the same positive excess returns, and that should be a cautionary note for those who tell the China story to justify sky high valuations for companies growing there. With all the caveats about accounting returns in place, this comparison is one of the most important ones in valuation and finance, for a simple reason.

Valuation is the other side of the coin. For those interested in digging a bit deeper into the nether reaches of ROIC, I thought that some of the best writing on the topic was worth sharing here.

Note that the traditional definition of Net Working Capital usually excludes cash from the Current Assets but I include it in this case because we then subtract out the excess cash. As you digest the bad news in the cross section, if you are a manager or investor, you are probably already looking for reasons why your company or business is the exception. Generally, you would expect companies in markets that are more protected from competition either domestic or global to do better than companies in markets where competition is fierce.

There are several ways to measure Return on Capital, but my preferred method is Return on Invested Capital ROIC which seeks to measure the return to all capital holders debt and equity. And I’ve made a high level guesstimate of required cash based on what I know about the businesses. I wasn’t lucky enough to take his class when I was at NYU but I have watched many Youtube videos of his classes all of which he records and shares online.


First, corporate measures of profits are not only historical as opposed to future expectations but are also skewed by accounting discretion and practice and year-to-year volatility.

I thought it was a valuable instructional resource on ROIC. It stands to reason that it is easier to earn excess returns in some businesses than others, mostly because there are barriers to entry.

Also, I have not made adjustments to capitalize leases here, daodaran should normally damkdaran done for lease heavy business models.

The nuances of calculating ROIC can be hotly debated by finance nerds like myself but my preferred approach is what is often referred to as the Asset Approach. Notwithstanding these concerns, analysts often compute a return on invested capital ROIC as a measure of investment return earned by a company:.

Spreadsheet with country data. We respect your privacy no spam ever.

Subscribe to ValueWalk Newsletter. I’ve only scratched the surface when it comes to ROIC. Here, while there are multiple measures that people use, there are only two consistent measures. The distribution across all firms is reported below: After all, it’s important how much money is spent to generate this operating income.

I have spent the last few posts trying to estimate what firms need to generate as returns on investments, culminating in the cost of capital estimates in the last post. camodaran

January Data Update 2: The picture below reports gross, operating and net margins, by sector, for global companies at the start of If you are wary because the returns computed used the most recent 12 months of data, dqmodaran are right be. One of the two regions of the world where companies earn more than their cost of capital is India, which the cynics will attribute damodaean accounting game playing, but may also reflect the protection from competition vamodaran some sectors in India, especially retail and financial services, have been offered from foreign competition.

This requires a high quality business that benefits from a durable competitive advantage or moat and even then, it’s not always a given that the company can maintain its returns; 2 Valuation is still important but it becomes less and less important as the holding period increases.

Spreadsheet with sector data. Specifically, as I have in prior years, I will examine whether the returns generated by firms dzmodaran higher than, roughly equal to or lower than their costs of capital, and in the process, answer one on the fundamental questions in investing. Notwithstanding claims to the contrary, there are many companies where managers left to their own devices, will find ways to spend investor money badly and need to be held to account.


Musings on Markets: January Data Update 7: Profitability, Excess Returns and Governance

If you are holding out hope that your region is the exception to the rule, ddamodaran table probably dispels that hope. Profitability, Excess Returns and Governance. Newer Post Older Post Home. It’s the Long Term, Stupid “In the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns.

ROIC = NOPAT / Invested Capital

ROIC basically computes the underlying return that a business earns on its cumulative investments in the business, no matter how those investments are financed. The list of metrics I look at when I analyze businesses is long: The median operating damodarna across all companies is 4. To the extent that the market is pricing in investment quality into stock prices, there is a very real possibility that the companies in the worst businesses may offer the best investment opportunities, if markets have over reacted to investment performance, and the companies in the best businesses may be the ones to avoid, if the market has damodzran up prices too much.

If asked to describe a successful business, most people will tell you that damodaraj is one that makes money and that is not an unreasonable starting point, but it is not a good ending point. The Amazon phenomenon, which has so thoroughly upended the retail business, seems to be coming to other businesses as well.

Some of the items lumped in with “Other Operating Assets” may not be pure operating assets. While you will see both in user, there are two key factors that should color which one you focus on and how much to trust that number. Never Miss A Story!

Vamodaran of the sectors roicc this list will attribute their place on the list to macro concerns, with oil companies pointing to low oil prices. The core idea is exceptional.