What is ROIC? Find out how much ROIC is good and how to calculate it to evaluate the efficiency of capital use to help investors determine the profitability of the business.
1. What is ROIC?
The study What is ROIC? Not only does it help assess the efficiency of a company's capital allocation, it also provides important information for investors to make decisions.
ROIC (Return on Invested Capital) stands for “Return on Investment”, an important financial ratio used to measure the efficiency of a company's use of capital. ROIC reflects the ability to generate profits from the capital invested in projects or business activities. When ROIC is combined with WACC (Weighted Average Cost of Capital), one can accurately determine whether a company is creating value from its invested capital.
For example, if an investor invests 200 million VND in company A, and that company has an ROIC of 10%, then each year the investor will earn a profit of 20 million VND from this capital.
2. What is ROIC index in stocks?
In the securities field, indexes play an important role in identifying potential stocks and building long-term investment strategies:
- For individual investors or investment funds: ROIC is a tool for screening promising stocks.
- For finance companies: This ratio aids in cost control and measures the return on invested capital.
- For financial managers: ROIC helps them evaluate the prospects of projects, thereby adjusting strategies accordingly.
- For shareholders in the group: This ratio is used to determine the ability to continue investing capital, based on the estimated return.
3. What is a good ROIC?
To evaluate a business with good ROIC, it is necessary to compare this index with the business's WACC.
- ROIC > WACC: The business is using capital effectively and creating value for shareholders.
- ROIC < WACC: The business operates inefficiently, causing a decrease in value for shareholders.
The difference between a company's ROIC and WACC will generally decrease over time as other companies enter the market and are forced to compete for higher returns.
It is also important to compare ROIC with industry averages and competitors in the same field. A company with an ROIC higher than the industry average is often considered to have a solid foundation and the ability to grow steadily.
According to experts, ROIC from 10% or higher is generally considered good, indicating that the business is growing sustainably. Conversely, a ROIC below 2% is a sign that the business is having difficulty reinvesting for the future.
4. How to calculate ROIC
Actually, there is not currently ROIC formula, but two common methods commonly used include:
Formula 1:
ROIC = (PARENT COMPANY'S PROFIT AFTER TAX/ INVESTED CAPITAL)*100%
Formula 2:
ROIC = NET OPERATING PROFIT AFTER TAX / INVESTED CAPITAL
In there:
- Net Operating Profit After Tax (NOPAT) is the net profit after tax from business operations, determined by taking pre-tax profit minus operating expenses, including employee salaries, taxes and other expenses.
- Invested Capital is the total capital a company uses for its business operations. This figure includes equity and debt, and is usually calculated based on fixed assets, cash, and related investments.
How to calculate investment capital:
INVESTMENT CAPITAL = OWNER'S EQUITY + DEBT – CASH AND EQUIVALENTS
For example: Based on the financial report of Group M in 2021: The parent company's profit after tax is 4,337 billion VND, capital investment is 36,092 billion VND. So, the ROIC index of group M will be: 4,337/36,092 x 100% = 12%
5. Where to see ROIC index?
To look up a company's ROIC index, investors can refer to the following financial data sources:
5.1. Corporate financial reports
- Profit report: ROIC can be calculated from after-tax profits and invested capital disclosed in annual or quarterly financial statements.
- Cash flow statement: Provides cash flow information, assisting in accurately determining invested capital and net operating profit.
5.2. Official information page of the enterprise
Many listed companies provide financial reports, performance indicators, and related documents directly on their websites.
5.3. Financial data platforms
- Stock analysis tools: Sites like Bloomberg, Reuters, or TradingView provide detailed data on ROIC and other financial metrics.
- Financial applications: Some applications such as Finbox, Investing.com, or Cafef (in Vietnam) support users to look up ROIC index for each business.
5.4. Reports from securities companies or investment funds
Securities companies and investment funds often issue company analysis reports that include ROIC. Investors can find this information in market newsletters or research papers.
6. Advantages and disadvantages of ROIC index
6.1 Advantages of ROIC index
- Financial performance assessment: ROIC helps compare capital efficiency between businesses in the same field, thereby helping investors easily identify companies that operate effectively, helping to plan and consider choosing the right ones. safe investment.
- Management measurement tools: This index reflects the management's ability to manage and allocate capital, supporting businesses in building long-term development strategies.
- Impact on stock valuation: ROIC affects the P/E ratio. Companies with high ROIC often attract investors, leading to increased stock valuations.
6.2 Limitations when using ROIC index:
- Not including debt: ROIC does not clearly reflect the risk from financial leverage, causing some highly indebted businesses to maintain impressive ROIC.
- Lack of consideration for time: This index does not distinguish between short-term and long-term investment projects, leading to an unfair comparison.
- Differences between industries: ROIC is not suitable for comparison across industries with different capital structures and investment costs.
- Easy to manipulate: Changes in accounting, such as depreciation adjustments or asset disposals, can cause ROIC figures to be skewed.
Conclude
ROIC is an extremely important financial indicator that helps investors and businesses evaluate the profitability of investment capital. Understanding and properly applying this indicator can help you make the right decision in choosing a business with the potential for sustainable development. However, to have a comprehensive and accurate view, it is necessary to combine ROIC with other financial factors and in-depth analysis of the industry. Through this article, HVA believe that mastering What is ROIC? and how to calculate it will support you in making smart and effective investment decisions. HVA always shares useful investment knowledge so that you can be fully equipped with information and achieve sustainable financial goals.
