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

69 Pages Posted: 26 Mar 2008 Last revised: 29 May 2008

Aswath Damodaran

New York University - Stern School of Business

Date Written: July 2007

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

Suggested Citation

Damodaran, Aswath, Return on Capital (ROC), Return on Invested Capital (ROIC) and Return on Equity (ROE): Measurement and Implications (July 2007). Available at SSRN: https://ssrn.com/abstract=1105499 or http://dx.doi.org/10.2139/ssrn.1105499

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.damodaran.com

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