GAAP-Based Return On Invested Capital

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Return on invested capital (ROIC) is not only the most intuitive measure of corporate performance, but it is also the best. It measures how much profit a company generates for every dollar invested in the company.

GAAP-based ROIC (seen in Figure 1) is based on a simplified after-tax profit (NOPAT) and invested capital that can easily be calculated using only the income statement and balance sheet. Many of our competitors employ this simplified approach to ROIC because it allows them to automatically calculate ROIC for large numbers of companies. In short, this approach sacrifices analytical rigor for speed and simplicity.

We provide the GAAP-based ROIC to show how our ROIC differs and to feature the impact of numerous adjustments we make from details buried in the footnotes and MD&A of 10-Ks. Our Robo-Analyst technology enables us to perform the diligence needed to calculate an accurate ROIC with scale.

Figure 1: How to Calculate GAAP-Based ROIC

GAAP-Based NOPAT/ Average GAAP-Based Invested Capital

where

GAAP-Based NOPAT = (Total Operating Revenue + Total Operating Income - Total Operating Expense) * (1- Limited Effective Income Tax Rate)

GAAP-Based Invested Capital = Short-Term Debt + Long-Term Debt + Total Shareholder’s Equity + Minority Interests

Average GAAP-Based Invested Capital = (GAAP Invested Capital + Previous Year GAAP Invested Capital) / 2

 Sources: New Constructs, LLC and company filings

We make it easy for the average investor to leverage the benefits of a high quality ROIC model and see a clear picture of a firm’s true profitability.

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