{"id":111,"date":"2009-05-27T17:06:51","date_gmt":"2009-05-27T11:36:51","guid":{"rendered":"http:\/\/idostocksmyself.wordpress.com\/?p=111"},"modified":"2020-03-03T17:08:12","modified_gmt":"2020-03-03T11:38:12","slug":"the-debt-factor-roic","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/the-debt-factor-roic\/","title":{"rendered":"The Debt Factor- ROIC"},"content":{"rendered":"

The Debt Factor – <\/strong>ROIC<\/a><\/p>\n

Why should you look at a company\u2019s ROIC?<\/p>\n

Let s start with first answering what is ROIC?<\/strong><\/span><\/p>\n

ROIC is a financial measure that quantifies how well a company generates cash flows<\/a> relative to the capital it has invested in the business. Here, the investment<\/a> represents pool of funds supplied by its shareholders & the lenders.<\/p>\n

ROIC \u2013 Earnings before Interest & Depreciation\/ Total Capital<\/p>\n

Let\u2019s see what does Total Capital mean??<\/strong><\/p>\n

Total Capital = Equity Capital + Debt Capital<\/strong><\/p>\n

Equity Capital: <\/strong><\/span><\/p>\n

Equity Capital is the money contributed by the promoters and the other shareholders. Equity holders are basically the owners of the company.<\/p>\n

Debt Capital:<\/strong><\/span><\/p>\n

Debt Capital is the money borrowed from banks\/ other lenders carrying an interest charge on it.<\/p>\n

Hence, the total capital of the firm is the sum of this <\/strong>equity capital<\/a> + <\/strong>debt capital<\/a>.<\/strong><\/p>\n

Now, why are we stressing on ROIC here??<\/strong><\/p>\n

ROIC is a true measure of the company\u2019s returns and gives a fair picture of the profitability as it includes the debt component. Companies can raise a lot of debt to increase their ROE<\/a> (return only on the equity capital excluding debt); hence showing a rosier picture of the return, but the main factor that needs to be taken into consideration is the Debt.<\/strong><\/p>\n

Let\u2019s look at an example:<\/strong><\/span><\/p>\n

Mr. A invests Rs 3 Crore in a portfolio of stocks, out of which he invests only 1 Crore of his own & raised the rest through debt from banks at 12% interest charge. In the next year the value of his portfolio appreciated to Rs.3.60 Crore. His return hence is, (60 lakhs less 24 Lakhs for -interest charge) = 36Lakhs. If we look at his ROE it is 36%, (i.e. 36 laks on Rs.1Crore) but if you look at his ROIC taking the debt factor into consideration it is 20%.<\/p>\n

Hence while investing in a company, watch out for companies having a high debt. Due to its capital structure<\/a> being highly leveraged<\/a>(high debt) its ROIC is very low.<\/p>\n

Hence, while looking at a company\u2019s returns & its capability to generate further returns we must give stress on its ROIC figure as well which shows a fairer picture of the company\u2019s capability.<\/p>\n

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The Debt Factor – ROIC Why should you look at a company\u2019s ROIC? Let s start with first answering what is ROIC? ROIC is a financial measure that quantifies how well a company generates cash flows relative to the capital it has invested in the business. Here, the investment represents pool of funds supplied by […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[1157,1151],"tags":[17,19,20,24,29,37,49,93],"modified_by":"MoneyWorks4me","_links":{"self":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/111"}],"collection":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/comments?post=111"}],"version-history":[{"count":0,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/111\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media?parent=111"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/categories?post=111"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/tags?post=111"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}