NOPAT and FCF are likely of limited use in a vacuum (i.e., one year). Accordingly, explain...

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 stands for return on invested capital. Accordingly, it is an important performance metric as it measures how much return is generated by the invested amount. The higher the return, the better is the investment. It is generally expressed as a percentage and is calculated as total return/amount invested.

MVA stands for market value added. This metric measures the difference between the market value of company and the capital contribution by investors. Thus the market value of both debt and equity gets reflected through this metric.

EVA is economic value added. It measures the amount of profit generated in excess of the required rate of return of company. It is calculated as NOPAT - invested capital x WACC. A positive amount reflects value creation over invested capital while a negative amount means value destruction of invested capital.

Historical trends come very useful in trend analysis. In trend analysis, last 5 year's or 10 year's return is studied to get an average idea of the performance of the asset or stock. It comes handy in making forecasts for the stock's behaviour in the next few years. The trends developed for the stock is compared with the trends of overall market and a forecast can be then made based on assumptions arrived by the analysts.

All these metrics are helpful in making an estimate or a forecast of future financial discourse. They lead us to make decisions regarding the effectiveness of an investment.

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