KwanK,
There are many different ways of calculating ROIC, and before I tell you how I calculate mine let me just summarize the idea behind ROIC. Basically, what you are trying to figure out is how efficient management is in deploying assets under its control. Another way of expressing the idea is ROAM (return of assets under management). These approaches avoid the pitfalls of ROE (return on equity) because ROE is very sensitive to leverage.
The numerator I use is operating income. This is pretax income and it does not include interest. The denominator I use is the sum of equity plus long-term debt. Alternatively, you might use fixed assets plus inventory plus A/R as the denominator. But in every case the denominator needs to be the calculated from the previous period's report.
So, for the year we would have operating income of $2,046, and we would have equity of $1,293 and LT debt of $261, for a denominator of $1,554. That would yield an ROIC of 132%.
Dell uses a different calculation. The exact method of calculation matters less than using it consistently, because its primary function is comparative (one company period to period, or one company compared to another), not absolute.
Actually, the method I like best is to use free cash flow as the numerator (before taxes), and assets under management plus accumulated depreciation as the denominator. The idea is you get a cash on cash return.
Hope this helps,
CTC |
