I compute the return on invested capital at the start of for each company in my public company sample of . Aswath Damodaran said. January 28, at am by Aswath Damodaran . for these companies to estimate excess returns (ROIC – Cost of Capital) for each firm. Return on Capital or Return on Invested Capital (ROIC) is something I . Aswath Damodaran is an NYU professor and the guru of valuation.

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This is the where the all important denominator comes in – Invested Capital. Base Hit Investing has a wonderful post explaining this very concept in more detail, which I’ll also re-list below. I could tell you stories that can answer this question differently, but the answer lies in the numbers. Are companies in some parts of the world likely to earn better returns on investments than others?

I wasn’t lucky enough to take his class when I was at NYU but I have watched many Youtube videos of his classes all of which he records and shares online. Note, that this is a comparison biased significantly towards finding good news, since by using a ten-average for the return on invested capital, I am reducing my sample to 14, survivor firms, more likely to be winners than losers.

Consequently, any accounting actions, no matter how well intentioned, will affect your return on invested capital.

They are likely cheap for a reason- because they generate low returns on capital. We would want to analyze the ROIC for both companies over multiple years to understand how sustainable it is and how susceptible it is to a cyclical downturn Drivers: The excess returns that we computed are particularly relevant when we think about growth, since for growth to create value, it has to be accompanied by excess returns.

Aswath Damodaran – January Data Update 7: Growth and Value

The public market place globally, at least at the start ofhas more value destroyers than value creators, at least based upon trailing returns on capital. Specifically, as I have in prior years, I will examine whether the returns generated by eamodaran are higher than, roughly equal to or lower than their costs of capital, and in the process, answer one on the fundamental questions in investing. What is driving the higher or lower ROIC and are the right inputs being used?


Debt and Taxes Damoadran Data Update 9: Instead find businesses that generate high returns on capital. The excess returns, in deciles six through nine are about as negative as excess returns, in deciles two through five.

Thus, if your story is that your company will benefit from economies of scale, I reflect that story by letting its operating margins improve over time, and if your narrative is that of a company with a valuable brand name, I endow it with much higher operating margins than other companies damodarsn the sector, but there is one limitation of profit margins.

There are several ways to measure Return on Capital, but my preferred method is Return on Roix Capital ROIC which seeks to measure the return to all capital holders debt and equity.

Aswath Damodaran – January 2018 Data Update 7: Growth and Value

If you want to delve into the details, my condolences, but you can read this really long, really boring paper that I have on measurement issues with the return on equity and capital.

This latter point is debatable have you heard of Amazon? January Data Update 1: The automobile and damodaaran businesses have been bad businesses,almost every year that I have looked at it for the last decade.

Subscribe to ValueWalk Newsletter. The sobering note, though, is that as India opens these sheltered businesses up for competition, these excess returns will come under pressure and perhaps dissipate.

ROIC = NOPAT / Invested Capital

It is true that my accounting returns are based upon one year’s earnings, and that even good companies have bad years, and using a normalized return on capital where I use the average return on capital earned over 10 years does brighten the picture a bit: I compute the return on invested capital at the start of for each company in my public company sample of 42, firms, using the following judgments in my estimation:. This post has extended way beyond what I initially planned, but the excess returns across companies are such a good window into so many of the phenomena that are convulsing companies today that I could not resist.


For a business to be a success, it is not just enough that it makes money but that it makes enough money to compensate the owners for the capital that they have invested in it, the risk that they are exposed to and the time that they have to wait to get their money back. It is interesting that the other part of the only other region of the world where companies earn more than their cost of capital is Eastern Europe and Russia, where competitive barriers to entry remain high.

January Data Update 3: The correlation between business quality and investment returns is tenuous, at best, and here is why. That, in a nutshell, is how we define investment success in corporate finance and in this post, I would like to use that perspective to measure whether publicly traded companies are successful. To examine differences across sectors, I looked at excess returns, by sector, dmaodaran US companies, in Januaryand classified them into good businesses earning more than the cost of capital and bad businesses earning less than the cost of capital.

Send me ocassional third party offers Yes No. If you are holding a stock for 1 or 2 years, then valuation is critical because the majority of return will be driven by the difference between price paid and intrinsic value.