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Hello Fools,

I have realized that there has been some confusion about how to calculate ROIC. The complexity of calculating ROIC become counter-productive when it takes too much time and double-checking.

So to help Fools, I have provided my readers with a simplified way to calculate ROIC in a new updated Economic Model Report. http://www.geocities.com/andrewychan/index.html

Moreover, I have just added an Excel spreadsheet for your calculation of ROIC.

For the purpose of general assessment of value creation capability of a firm, it is good enough. In fact, I use this formula every day, and make some adjustments whenever they are significant. I usually don't bother with small exceptions unless I decide to perform an EVA model.

If you stick to this simplified formula, you should do quite well in calculating ROIC for your companies. Whenever in doubt, think cash, think in terms of operating activities, think in terms of capital invested and think conservatively. There is no need to be aggressive, you are only kidding yourself!

Fool On!

Andrew

Acronyms:

NOPAT: Net Operating Profit After-Tax
NOPBT: Net Operating Profit Before-Tax
CTR: Cash Tax Rate (Using the effective tax rate is good enough)
NIBCLs: Non Interest Bearing Current Liabilities
NOPAT = NOPBT x (1-CTR)

NOPAT

1. Calculating NOPBT:

Start with:
+ Sales

Minus:
- Cost of goods sold
- Selling and marketing expenses
- General and administrative expenses
- R&D
- Depreciation
- Other operating expenses
- (Ignore expenses such as non-recurring charges, amortization of goodwill, non-cash items, acquired in-process R&D…)

Add back:
- Amortization of goodwill (only if it is included in depreciation)

2. NOPAT

NOPAT = NOPBT x (1-CTR)

Invested Capital

Invested Capital equals:

+ Net working capital (Operating Assets - NIBCLs)
+ Net property, plant & equipment
+ Other operating assets
+ Operating L-T investments (unless they are long-term low-risk income securities)
+ Gross goodwill
+ Unrecorded goodwill
+ Cumulative non-recurring costs

ROIC

ROIC = NOPAT / AVG Invested Capital

Some people may use beginning or ending balances. I use Beginning IC to calculate EVA. I use AVG IC for simple ROIC assessments to be consistent with the way ROE and ROA are calculated as they use avg equity and assets.
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