Which one would you choose for long term value creation - ROIC vs ROE vs ROA?
Which financial metric would you want to see when trying to invest for long term value creation?
Finance 101 would teach you multiple return metrics that use the Income Statement and the Balance Sheet but real magic happens when you understand the intricate details of the ratios and apply them in reality.
Of the 3 return metrics namely Return on Invested Capital (ROIC), Return on Assets (ROA) and Return on Equity (ROE); ROIC wins this place, here’s why:
ROIC: Computes return generated over the invested capital, i.e. debt and equity. Tries to isolate the operational performance without getting influenced by the capital structure
ROA: Computes the asset efficiency and is better suited for industries that are heavy on assets (eg. Manufacturing) - can be distorted by non operating items or varying depreciation policies.
ROE: Ideal for equity investors who are willing to understand the return on their invested share however it is very sensitive to the capital structure (high debt can inflate ROE)
More gyaan on this post by Werner Rehm: https://www.linkedin.com/pulse/mma-metrics-cfroi-vs-roic-werner-rehm-vp7re/
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