When we usually calculate ROIC (Return on Invested Capital), it is more often the returns being generated on capital that has already been invested, could be a one year ago or ten. We want to know the returns the company can earn on their future investments and to get a better idea of that we try and calculate the return on ‘incremental’ capital invested i.e. incremental recent investments.
A rough way to do that is take the amount of capital the said business has added over x amount years and compare with the incremental growth in earnings (net income) in that period of time.
ROICI = Change in earnings / Total Capital Invested.
In case of Maharashtra Seamless, Total Capital Invested from 2015-2024 was ~2,017Cr, TCI is nothing but (Equity + Debt & CLO – Goodwill). And during the same period earnings increased by ~833Cr, so they basically invested 2,107Cr of incremental capital and earned 833Cr. I’m missing a few decimals here but the return on incremental capital they invested is ~41%.
During the above period, the 2,017Cr was ~68% of their cumulative earnings within that timeframe. So they were deploying/reinvesting 68% of their capital @ 41.3%, so to find out what the entire company’s value is being compounded at, we need to multiple the above two percentages and we get 28.1%.
Historically, a stock’s performance over the course of time either reverts or increases to the rate at which they are compounding their own value.
A great big deal of Indian equities actually have high ROICI, this is because there is a lot of scope for growth and even the largest companies in India by mkt cap can still be considered to be in their growth phase. Perks of being an emerging market with a huge TAM.
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