Re: ROIC vs ROA vs CapEx in the FCF Statement
Fwiw, I typically look at the quarterly FCF Capital Expenditures (how much of the FCF is being reinvested into Capital Assets). For DELL I get this data from their FCF Statement (use barchart.com)
However, ROIC & ROA shows how efficient management is doing with that invested capital.
What's the point of investing your FCF into capital assets if management makes lousy investments.
I do notice that morningstar.com reports ROIC as well as ROE & ROA for all the companies in their database.
Key Metrics: Return on Equity and Return on Invested Capital (How ROE and ROIC can inform you about management and competitive advantages)
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Here's a breakdown of ROIC and ROA, along with their key differences:
ROIC (Return on Invested Capital):
- Measures: How effectively a company generates profit from the capital it has invested, considering both debt and equity financing.
- Formula: ROIC = Net Operating Profit After Tax (NOPAT) / Invested Capital
- Invested Capital: Usually calculated as Total Assets - Current Liabilities
- Interpretation: A higher ROIC indicates a company is better at generating returns from its investments.
ROA (Return on Assets):
- Measures: How efficiently a company uses its assets to generate profit, focusing solely on assets.
- Formula: ROA = Net Income / Total Assets
- Interpretation: A higher ROA suggests a company is utilizing its assets more productively.
Key Differences:
- Capital Consideration:
- ROIC encompasses both debt and equity financing, providing a broader view of capital usage.
- ROA focuses solely on assets, without accounting for debt financing.
- Profit Measure:
- ROIC typically uses NOPAT, which excludes the effects of taxes and financial leverage.
- ROA uses net income, which includes those factors.
- Denominator:
- ROIC's denominator is invested capital, excluding non-operating assets and current liabilities.
- ROA's denominator is total assets, including all assets regardless of their operational use.
Which Metric to Use:
- ROIC: Generally preferred for a more comprehensive assessment of a company's profitability and capital allocation decisions.
- ROA: Useful for understanding asset efficiency and comparing companies within similar industries that have similar capital structures.
In summary:
- ROIC offers a broader view of profitability and capital efficiency, factoring in debt financing.
- ROA focuses on asset utilization and is often used for within-industry comparisons.
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Some good points to consider (and watch) especially if a company has a new CEO and management shake up. PYPL comes to mind |
