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I am confused about the right way to calculate ROIC. I seemed to find different variations when I searched on google.

ROIC = (NOPAT) / Invested Capital

For NOPAT,

Net operating profit after tax = Reported Net Income - Investment and Interest Income - Tax Shield from Interest Expenses (effective tax rate x interest expense) + Goodwill Amortization + Non-Recurring Costs plus Interest Expenses + Tax Paid on Investments and Interest Income (effective tax rate x investment income)

1. Why do you use net operating profit instead of net income? How is using net operating profit a better gauge for returns?
2. Also why do you need to take into account the tax?

For Invested Capital,

I have found different interpretations:

Invested Capital = Total Assets less Cash - Short-Term Investments - Long-Term Investments - Non-Interest Bearing Current Liabilities

Invested Capital = Total Assets - Non-Interest Bearing Current Liabilities + Cash flow adjustments (e.g. Increase in LIFO reserve + Increase in allowance for bad debt) + Off-Balance sheet adjustments (e.g. Implied interest on operating leases + expenses that were capitalized, like R&D)

Invested Capital = Total Assets less Cash - Non-Interest Bearing Current Liabilities

Invested Capital = Current Assets less Cash + Fixed Assets - Current Liabilities

3. May I know which is the correct interpretation?

I am unable to grasp this well since I never took any finance and accounting module back in school last time

(22-02-2014, 06:29 AM)ashparagon Wrote: [ -> ]I am confused about the right way to calculate ROIC. I seemed to find different variations when I searched on google.

ROIC = (NOPAT) / Invested Capital

For NOPAT,

Net operating profit after tax = Reported Net Income - Investment and Interest Income - Tax Shield from Interest Expenses (effective tax rate x interest expense) + Goodwill Amortization + Non-Recurring Costs plus Interest Expenses + Tax Paid on Investments and Interest Income (effective tax rate x investment income)

1. Why do you use net operating profit instead of net income? How is using net operating profit a better gauge for returns?
2. Also why do you need to take into account the tax?

For Invested Capital,

I have found different interpretations:

Invested Capital = Total Assets less Cash - Short-Term Investments - Long-Term Investments - Non-Interest Bearing Current Liabilities

Invested Capital = Total Assets - Non-Interest Bearing Current Liabilities + Cash flow adjustments (e.g. Increase in LIFO reserve + Increase in allowance for bad debt) + Off-Balance sheet adjustments (e.g. Implied interest on operating leases + expenses that were capitalized, like R&D)

Invested Capital = Total Assets less Cash - Non-Interest Bearing Current Liabilities

Invested Capital = Current Assets less Cash + Fixed Assets - Current Liabilities

3. May I know which is the correct interpretation?

I am unable to grasp this well since I never took any finance and accounting module back in school last time

Let this ignoramus try to put it my way?
(Correct me if i am wrong)

Net income=Income accounted for everything in a company. All the "chapalangs" not due to business operations are accounted too.

Well Nopat =You know the definitions. (My headache too)

For me it is always good to investigate more how the Nett Income has been accounted for. Some companies' Nett Income are not so healthy or favourable after all.