Return on Capital (ROC), Return on Invested Capital (ROIC) and Return on Equity (ROE): Measurement and Implications

Abstract

If there has been a shift in corporate finance and valuation in recent years, it has been towards giving excess returns a more central role in determining the value of a business. While early valuation models emphasized the relationship between growth and value - higher growth firms were assigned higher values - more recent iterations of these models have noted that growth unaccompanied by excess returns creates no value. With this shift towards excess returns has come an increased focus on measuring and forecasting returns earned by businesses on both investments made in the past and expected future investments. In this paper, we examine accounting and cash flow measures of these returns and how best to forecast these numbers for any given business for the future.

Keywords: Accounting returns, ROIC, ROE, ROC, Return on equity, Return on Invested Capital

JEL Classification: G12, G31, M41