Invested capital

[FrankCFA]

See Invested capital in different topic. Will all of them equal?
1. Net owrking capital + Net PP&E
2. Long-term debt + equity
3. Operating asset - operating liabilities

 

[FrankCFA]

When comparing firms with different capital structures, ROIC(NOPLAT/ invested capital) is preferred over ROE….not sure why…

 

[Lucky_27]

FrankCFA wrote:
When comparing firms with different capital structures, ROIC(NOPLAT/ invested capital) is preferred over ROE….not sure why…

Hi FrankCFA,
If you think of how NOPLAT is calculated: EBIT +/- change in deferred taxes = NOPLAT, you see that interest expense is not considered. This is a good thing if you compare 2 companies with different capital structure (let’s assume one has more debt, which is normally cheaper than equity, this leads to lower NI, but creates a higher tax shield, thus to a higher CF b/c of lower taxes), so you compare “apple with apples”.
Acording to the LOS, I think what’s important to remember is:
1) ROIC = return to both equity and debt (b/c it has NOPLAT in the numerator) > use it for comparing firms with different CAPITAL STRUCTURES!
> a higher ROIC (relative to peers) means that the company is having a COMPETITVE ADVANTAGE (in the production, sale of their products)
2) ROCE = uses pretax operating earnings in the numerator > use it for comparing firms with different TAX RATES!

 

[inchvbeam]

May I check on this again please:
Will all of them equal?
1. Net owrking capital + Net PP&E
2. Long-term debt + equity
3. Operating asset - operating liabilities

 

[Flashback]

inchvbeam wrote:
May I check on this again please:
Will all of them equal?
1. Net owrking capital + Net PP&E
2. Long-term debt + equity
3. Operating asset - operating liabilities

By accounting approach, first are resources (assets) and second are claims thus sources of financing of the first one.
The third one is an approach for determine the net working capital which you have already mentioned in the first point.

 

[40yoCFAcandidate]

Singapore, #2 is very unlikley to match the others. All it would take is one asset not defined as “operating”, which i supsect most companies have.
As for #1and #3, if you consider PPE to be an Operating Asset, then perhaps they may be the same. I would really want to see definitions and a Balance Sheet to answer it, though.
My disclaimer: The terms”Operating Asset” and “Operating Liability” do not have any definition in GAAP, so people will define them differently.Generally conveniently. When I read a question like this it gives me a general sense of unease.
ps…i am teaching my kids “Singapore Math” which is a style of math education marketed here in the US to those who want our kids to have math test score like the kids from Singapore! Yes, it is a real thing.