Answer each question succinctly yet completely. Be mindful of the multiple parts to each question. 6....

Answer each question succinctly yet completely. Be mindful of the multiple parts to each question.

6. NOPAT and FCF are likely of limited use in a vacuum (i.e., one year). Accordingly, explain why ROIC, MVA, and EVA—and the historical trends thereof—are important performance metrics in a financial analysis exercise.

Expert Solution

ROIC is Return on Invested Capital. It is the return generated by the firm over its operating assets or in other words, invested capital (debt plus equity). ROIC trends helps an analyst comment on the quality of earnings since the NOPAT (Net Operating Profits After taxes) is adjusted for non-recurring or non-operating transactions.

MVA stands for Market Value Added. It is the difference between market value of the firm (Market value of equity + Market value of debt) and the invested capital (Book value of debt + Book value of equity). It implies the wealth added by the management due to efficient operations and good governance practices)

EVA is the economic value added. It is the excess of NOPAT over the opportunity cost of the invested capital. It is quite useful for the company as well as shareholders. The management may link bonus with EVA which is a better measure than the profits which can be manipulated and do not take into account the risk-return relationship. Similarly, the shareholders can know the performance of a company after adjusting for the risk they are taking by investing into the company.

To conclude, NOPAT and FCF do not carry any meaning on a standalone basis. They can be used to derive the MVA/EVA or other such metrics that can be compared with the past year.

jeff jeffy answered 2 years ago

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