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Return On Invested Capital And Return On Capital Employed

"Return on invested capital" is

NOPAT / (BV of Equity + BV of Debt - Cash)

Benjamin Graham's recommended equation excludes cash because cash was not thought to reflect management's performance then. Because we know that cash is an insurance policy and amassed by spendy CEO's, cash ought to be included. Also, when Graham was writing these words in the late 1940's, managements, especially those of industrials, could be trusted to return cash to shareholders by handing back more frequent dividends. Here is an equation that doesn't exclude cash:

NOPAT / (Fixed assets + working capital, i.e. "Capital Employed")

Capital Employed is made up of fixed assets and working capital, that is, it excludes intangibles, which managements have been marking up for the good part of the last decade. By excluding them, we look at what management can do with their brands rather than expecting management to perform well as a proportion of how much the brands are thought to be worth. Managements come and go, brands stay.

Goodwill is also excluded. This is the amount of money that management has paid for acquired companies in excess of the acquiree's book value, which already ought to have incorporated its intangibles. Another reason to exclude this type of asset is that management may pay a lot for an acquiree and mark it up, but it may take many years to realize earnings on this one-time expense. 'Prices paid for acquisitions' is a separate issue from 'operational effectiveness'.