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David Trainer
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Follow me on Twitter: @NewConstructs David is CEO of New Constructs (www.newconstructs.com), an independent research firm that leverages proprietary technology to find key insights from the Financial Footnotes of 10Ks and 10Qs. Having analyzed over 70,000 annual reports and their Financial... More
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  • ROIC: Definition And Formulae For Return On Invested Capital 5 comments
    Nov 8, 2012 6:02 PM

    ROIC is the true measure of a company's cash on cash returns.

    It is calculates as NOPAT/Invested Capital or NOPAT/Revenue * Revenue/Invested Capital*.

    It is the most important and truest measure of profitability. It is the key variable in calculating economic earnings.

    *I recommend using average invested capital with adjustments for any acquisitions that close after the first day of the fiscal year.

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  • SeekingTruth
    , contributor
    Comments (1335) | Send Message
     
    David,
    How can ROIC be adjusted in a valid and realistic way to reduce or eliminate the effects of "skewing" of Treasury Stock on ROIC and other financial valuation ratios?
    What is your view about the financial value of Treasury Stock and how it is treated by GAAP vs. any changes, if any , you might suggest to GAAP on Treasury Stock?
    8 Dec 2012, 11:31 PM Reply Like
  • David Trainer
    , contributor
    Comments (1007) | Send Message
     
    Author’s reply » SeekingTruth:
    Pls be more specific on how Treasury Stock skews ROIC. I assume you are assessing Invested Capital from the liability side.

     

    We do not see any major issues with how GAAP treats Treasury shares. It is essentially retired equity as those shares are taken out of circulation, do not receive dividends and have no voting rights.

     

    I may not understand your question.
    14 Dec 2012, 10:50 AM Reply Like
  • rhorn az
    , contributor
    Comments (4) | Send Message
     
    I am unclear as to how you would handle retained earnings in your definition of invested capital---in the calculation or excluded?
    17 Jun 2014, 12:28 PM Reply Like
  • David Trainer
    , contributor
    Comments (1007) | Send Message
     
    Author’s reply » rhorn az: It depends on what the company does with this retained earnings. If they are held as cash or cash equivalents then we exclude them from invested capital as the company is not actively using that money to generate revenue. Retained earnings would only be factored into our invested capital calculation once the company actually invests them into its business.
    17 Jun 2014, 12:36 PM Reply Like
  • rhorn az
    , contributor
    Comments (4) | Send Message
     
    Would another way of stating this be--"total equity less investments in cash equivalents=invested capital"?
    22 Jun 2014, 10:33 AM Reply Like
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