One of the most used fundamental value is to assess a company’s ROE, which shows how much does the company make from the equity that have been invested into the company. However, ROE is lacking some aspects as it only includes equity, where leaving borrowings or debts behind. Do take note that company borrows money to expand their businesses, hence any sort of borrowing shall be considered as their invested capital.
The formula to calculate ROIC is only slightly different with ROE, as it only adds all the borrowing and categorized them as invested capital.
So shall ROIC be prioritized over ROE? Actually, both shall be used to compare companies in the same sector. The example given below is to compare SCGM, BPPLAS, and TGUAN, where all these three companies are all related to plastic packaging. As we can see BPPLAS has the same ROE and ROIC because it has no borrowing, and ROIC for both SCGM and TGUAN has been dragged down due to the higher amount of borrowing.
However, having a lower ROIC does not necessary means that the company is bad, it just acts as the broader perspective to assess a company. ROE only focuses on equity (shareholder), but ROIC focuses on both borrowing and equities (shareholder and bondholder).
In short, BPPLAS with the highest ROE and ROIC shall be the best option out of these three.
For more information, visit: https://www.facebook.com/InvestingKnowEverything/