Return on Invested Capital

Morgan Stanley

Research

44 Pages

Morgan Stanley explains how return on invested capital clarifies whether a firm creates value when it grows. It connects ROIC to free cash flow and economic profit, then shows how accounting choices like expensing research and development can distort the picture. A key provocation is that growth can be worthless, or harmful, when returns merely match the cost of capital.

Date published: October 6, 2022

Key Takeaways

Value creating growth: Growth matters only when ROIC stays above the cost of capital.
Cash flow bridge: ROIC ties profitability and reinvestment to free cash flow and economic profit.
Accounting adjustments: Capitalize key intangibles and treat leases and goodwill consistently to avoid inflated ROIC.

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