Discounting future cash flow ensures the investment is attractive relative to the capital’s opportunity cost, and the return on the next best alternative.
This report examines return on invested capital (ROIC), a financial metric that can help with assessing whether a company is creating value with its investments.
Simply stated, return on invested capital (ROIC) is a measure of value creation.
A company creates value when the present value of the cash flows from its investments are greater than the cost of the investments. For example, one dollar invested in the business becomes worth more than one dollar in the market. Discounting future cash flows makes sure the investment is attractive relative to the capital’s opportunity cost and the return on the next best alternative.
This report will discuss how to calculate ROIC, show how it is connected to free cash flow, economic profit, and growth, work through some of the practical challenges in estimating it properly, show empirical data, and review how the introduction of intangible investments can reshape the figures.