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I've googled and read many articles about "ROIC" and "Invested Capital", but I'm still confused about how to calculate them.

The best explanation I've seen so far is:

There are at least two ways to calculate "Invested Capital":

  • financing approach: $Invested Capital = Total Debt \& Leases + Total Equity \& Equity Equivalents + NonOperating Cash \& Investments$
  • operating approach: $Invested Capital = Net Working Capital + PP\&E + Goodwill \& Intangibles$

I've tried to apply those approaches to AAPL's 2022 fiscal report (SEC Form 10-K).

Financial approach:

A) Commercial paper: 9,982
B) Term debt (Current liabilities): 11,128
C) Term debt (Non-current liabilities): 98,959
D) Total shareholders’ equity: 50,672
E) Cash used in investing activities: (22,354)
F) Cash used in financing activities: (110,749)

Invested Capital = A+B+C+D+E+F = 37,638

operating approach:

A) Total current assets: 135,405
B) Total current liabilities: 153,982
C) Property, plant and equipment, net: 42,117
D) Goodwill & Intangibles: N/A

Invested Capital = A-B+C+D = 23,540

The results from the two approaches are not equal.

Questions

  1. Did I calculate them wrong?
  2. Are the results from the two approaches always equal to each other?
  3. If false, how to choose which approach is for ROIC?
  4. Can I apply the financial approach to all companies with just those 6 values/facts, and calculate and compare the ROIC for different companies?
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1 Answer 1

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Because ROIC is not part of of the official accounting standards such as US-GAAP or IFRS, its definition may vary, also depending a bit on how the party defining it is planning to use it and the availability of the data to that party.

The two approaches you have in your question would give the same result when the definitions are made and used correctly and consistently. From what I can see, some of the definitions and examples in the articles you have referred to are plain wrong or misleading; for example, there should be no need to refer to any of the cash flow statement items when calculating the invested capital.

A company's balance sheet can be categorized as follows when calculating the invested capital for ROIC:

Current Assets
   Cash and Equivalents
   Other Current Assets
Fixed Assets
   Financial Investments
   Other Fixed Assets
Total Assets

Current Liabilities
   Financial and Leasing (FL) Debt
   Other Current Liabilities
Long Term Liabilities
   Financial and Leasing (FL) Debt
   Other Long Term Liabilities
Shareholders' Equity
Total Liabilities and Equity

Given that

Total Assets                  = Total Liabilities and Equity
Current Assets + Fixed Assets = Current Liabilities + LT Liabilities 
                                + Shareholders' Equity
Shareholders' Equity          = Current Assets + Fixed Assets 
                                - (Current Liabilities + LT Liabilities),

we can show that the two approaches would yield the same result for the invested capital (IC) as follows:

IC = Shareholders' Equity 
     + Total FL Debt 
     - Cash and Financial Investments
   = Shareholders' Equity 
     + (Current FL Debt + LT FL Debt)
     - (Cash and Equivalents + Financial Investments)
   = Current Assets + Fixed Assets 
     - (Current Liabilities + LT Liabilities) 
     + Current FL Debt + LT FL Debt 
     - (Cash and Equivalents + Financial Investments)
   = Current Assets + Fixed Assets
     - (Current Liabilities + LT FL Debt + Other LT Liabilities) 
     + Current FL Debt + LT FL Debt 
     - (Cash and Equivalents + Financial Investments)
   = Current Assets - Cash and Equivalents 
     + Fixed Assets - Financial Investments 
     - Current Liabilities + Current FL Debt 
     - Other LT Liabilities 
   = Other Current Assets
     + Other Fixed Assets
     - Other Current Liabilities 
     - Other LT Liabilities              
   = Other Current Assets - Other Current Liabilities 
     + Other Fixed Assets - Other LT Liabilities
   = Net Working Capital + Other Fixed Assets

where

Net Working Capital = Other Current Assets - Other Current Liabilities

and assuming Other LT Liabilities = 0. If Other LT Liabilities is not zero, you have to use the formula taking it into account.

There might be variations in the definition of either approach but either approach would yield the same result with the other as long as the terms are defined carefully and consistently in both approaches whenever a change is made.

If you wish to know more on ROIC and how to better measure and interpret it, one of the articles I would suggest reading would be Damodaran's "Return on Capital (ROC), Return on Invested Capital (ROIC) and Return on Equity (ROE): Measurement and Implications" article from 2007.

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  • $\begingroup$ Really thanks for your reply! You explained the whole thing very well! $\endgroup$
    – Xaree Lee
    May 23, 2023 at 18:41

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