Decomposition of ROIC

To gain a better understanding of the organization, it’s interesting to break down ROIC into components and analytically compare it with competitors.

For example, as shown in the image, Costco has a lower operating margin compared to its competitors, yet it manages to create higher value due to its significantly better asset productivity.

Additionally, in terms of expenses, the share of general expenses is lower than that of direct expenses, which likely allows for better operating leverage and the ability to maintain a lower margin.

Moreover, ROIC should be calculated both with and without goodwill.

If we include goodwill and other intangible assets that arise from the acquisition of the organization in the assets and calculate ROIC, it will show us how much value management creates beyond the premium paid for acquisitions.

If we exclude goodwill and other intangible assets from the assets and calculate ROIC, we will see how effectively the organization operates compared to its competitors. In other words, this metric is a good tool for comparing apples to apples.

p.s.

#VALUATION – Measuring and Managing the Value of Companies
7th Edition
McKinsey & Company
Tim Koller, Marc Goedhart, David Wessels