Disagree - ROIC works mathematically. But it's a terrible measure for a company with substantially negative equity as it amplifies the result.
I don't know what your definition of ROIC is but here's mine - Operating Profit * (1- tax rate)/ Equity + All long term liab LESS current liab.
I'm not sure what you mean when you say "no-operating cash". I do know of some analysts that subtract excess cash but in the case of HPQ(negative w/c model), I don't think it's the best approach.
Now, if you have negative equity, you reduce the denominator, thus enhancing the overall ROIC. I don't see how it can be of serious use. It's obviously flawed - more so, when the business model is capital intensive (HPQ isn't capital intensive but it's on the heavier side, for sure).
HP just doesn't actually have a 40+% ROIC - even though plugging it in the formula blindly will give you that result. You have to adjust the while thing but I haven't figured out how yet.
ROA is the best metric to use for HPQ, hands down (if you were to use one).
Please can you clarify where exactly you disagree. Also, please can you show me an instance where negative equity has accurately provided a ROIC. In 2014, HPQ had a ROIC of sub-10%. Since book value went negative, ROIC consistently averaged above 50%. If anything, a 45% ROIC is pretty poor given historical results. |
