Sample interview questions: Can you explain the concept of a return on investment capital (ROIC) and how you use it in investment analysis?
Sample answer:
Concept of Return on Investment Capital (ROIC)
ROIC is a financial metric that measures the profitability and efficiency of a company’s investments. It represents the return generated for each dollar of capital invested. The formula for ROIC is:
ROIC = Net Operating Profit After Taxes / Invested Capital
Invested capital typically includes debt and equity financing used to fund the company’s operations and assets.
How ROIC is Used in Investment Analysis
ROIC is a crucial metric in investment analysis for several reasons:
- Assessment of Investment Performance: ROIC provides investors with an understanding of the return they can expect from their investment. A high ROIC indicates that the company is generating a substantial return on its capital investments.
- Comparison of Companies: ROIC enables investors to compare the profitability and efficiency of different companies within the same industry. Higher ROICs indicate more efficient use of capital and potentially better investment prospects.
- Valuation: ROIC can serve as a valuation tool. Companies with consistently high ROICs often command higher valuations due to their ability to … Read full answer