which point should be analyzed in Return on invested capital and profitability analysis by the user...

which point should be analyzed in Return on invested capital and profitability analysis by the user regarding the company's operation ? why ? provide an explanation .

Expert Solution

First lets understand what ROIC is and how it is calculated.

ROIC means the net amount of money that a company makes after meeting all its relvent payouts. Its a ratio of its net earnings on its invested capital.

ROIC is calculated by (Net Income - Dividends) / Debt + Equity

A general rule is if the company ROIC is above 2%, it means the company is doing good and if it is less than 2% it means the company has less value in market.

As a user you can analyse the following point:

1. Determine the ratio of the company to determine its health.

2. ROIC does not indicate from which segment or produt the company earn more revenue, as the ration is company wide. So you have to check whether all the units are profitatble units or only a single unit is generating the maximum cash flows.

3. Another thing that can be checked is if the company ROIC is less than the return on shreholder equity (ROE) it means that the company is operatin majory on borrowed funds.

These are some point which the user shall analyse for ROIC.

ekkarill92 answered 2 years ago

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