Payback ( ROC ), or return on invested capital ( ROIC ), is the ratio used in finance , valuation and accounting, as a measure of profitability and potential value creation of a company after taking into account the amount of initial capital invested. Ratio is calculated by dividing after-tax operating profit (NOPAT) with book value of both debt and equity capital minus cash.
Video Return on capital
Pengembalian pada formula modal yang diinvestasikan
There are four main components of this measurement that are worth noting. While ratios such as return on equity and return on assets use net income as the numerator, ROIC uses operating income. Second, the operating income is adjusted to reflect the effective or marginal tax rate. Third, while many financial calculations use market value rather than book value (for example, calculating the debt to equity ratio or calculating the weight for the weighted average cost of capital (WACC)), ROIC uses the book value of capital as the denominator. This procedure is done because, unlike market values ​​that reflect future expectations in an efficient market, book value more reflects the amount of initial capital invested to generate profits. Lastly, because ROIC tries to measure how well a company is able to generate operating profits per unit of invested capital, the ratio is often calculated using capital invested over a given year, rather than the average capital invested; However, some analysts still prefer to use the latter.
Some practitioners made additional adjustments to the formula to add depreciation, amortization, and depletion costs back to the numerator. Because these costs are considered "non-cash expenditures" which are often included as part of operating costs, this reincarnation practice is said to reflect more of the company's cash return over a given period of time. Others, however, may argue that these non-cash costs must remain abandoned from the formula as they reflect a decrease in the useful life of the particular asset in the denominator.
Maps Return on capital
Investment capital formula
The calculation of invested capital measures the amount of initial capital invested by the firm used to generate profits for the provider of capital (debt and equity investors). An equivalent way to calculate this amount is to reduce current liabilities, non-operating assets, and cash and the equivalent of the total assets of the company.
Relationship with WACC
Because financial theory states that the value of investment is determined by the amount and risk of expected cash flows to investors, it is worth noting ROIC and its relation to the weighted average cost of capital (WACC).
The capital cost is the expected profit from investors because it assumes the risk that the projected cash flow from investment deviates from expectations. It is said that for investments in which future cash flows are incrementally uncertain, rational investors need a higher rate of return gradually as compensation to assume higher levels of risk. In corporate finance, WACC is a general measure of the expected minimum weighted returns expected from all investors in a company considering the future risk of future cash flows.
Because the return on invested capital is said to measure the company's ability to generate returns on capital, and since WACC is said to measure minimum expected returns by the firm's capital providers, the difference between ROIC and WACC is sometimes referred to as the company's "over-refund" or "economic gain ".
See also
- Cash flow on investment (CFROI)
- Profitability
- Profit rate
- Portfolio return rate
- Profit maximization
- The profit rate trend falls
References
Source of the article : Wikipedia
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