| The ROIC growth formula relies on evaluating return | | | | income counts money that a company receives from |
| on invested capital (also known as ROIC) as a way | | | | all sources, whereas NOPAT is derived from the sales |
| of looking at stocks that helps smart value investors | | | | that a business makes from the ongoing operations |
| find good stocks to buy. First let's look at what is | | | | of its main business. Some of the revenue that is not |
| return on invested capital, then we'll examine why | | | | included in NOPAT are things like interest income |
| companies with comparatively large values of this | | | | from cash and cash equivalents (short term securities |
| key performance indicator tend to outperform their | | | | like T-Bills), and rent from real estate that the |
| competition over time (and make good value | | | | company may own, but sub-leases to other |
| investment candidates). | | | | businesses because it is not currently needed by the |
| The first step in the ROIC growth formula is | | | | company. These types of revenue, that are not |
| understanding how to calculate ROIC for the | | | | from sales of the companies main products and |
| companies that you are thinking about investing in, so | | | | services, add noise to what we are seeking - a clear |
| here is the formula: | | | | view of the company's operating efficiency - so we |
| (Net Operating Profit After Taxes) / (Invested | | | | take them out of the equation. The second thing |
| Capital) | | | | that we have to consider is that invested capital is |
| Now there are a couple of things that must be noted | | | | not just equity (like what is used in return on equity |
| about this formula. First, net operating profit after | | | | (ROE) calculations), but also includes long term debt |
| tax (NOPAT)is not the same thing as net income. Net | | | | that is used to grow and sustain the business. |