Why do we say that return on invested capital (ROIC) is not affected by the amount of debt on the company’s balance sheet.
I mean isn’t it divided by invested capital aka both the money of equity and bondholder?
Yes but EBIT is used in the numerator so it’s a pre-interest measure.
It’s affected by the total capital on the balance sheet, but not by how much of that total capital is debt vs. equity. If a company borrows a ton of money and retires an equal amount of common stock, its ROE will increase while its ROIC will remain unchanged.
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ok so basically like who cares about how much debt or equity we have because the formula doesn’t make a distinction between the two right?
Bingo!
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grazie milleee