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Oana Labes Profile picture
@IAmOanaLabes
Jul 16 • 7 tweets • 2 min read Twitter logo Read on Twitter
ROI vs ROIC vs ROE vs ROCE vs ROE vs ROA

Performance metrics are confusing. Here’s how to navigate them. Image
1️⃣ Return on Investment (ROI)

- Formula: ROI = (Net Profit / Cost of Investment) * 100%
- Caveat: ROI doesn't consider the time value of money, which makes it less useful for multi-period investments.
2️⃣ Return on Invested Capital (ROIC)

- Formula: ROIC = NOPAT / (Long Term Debt + Equity - Cash)
- Caveat: ROIC may be misleading for companies with large non-operating cash balances.
3️⃣ Return on Equity (ROE)

- Formula: ROE = Net income / Shareholder's equity
- Caveat: ROE can be heavily inflated by excessive use of leverage
4️⃣ Return on Capital Employed (ROCE)

- Formula: ROCE = EBIT / (Long Term Debt + Equity)
- Caveat: ROCE's lack of consideration for cost of debt can lead to misleading results for companies with substantial leverage and interest costs
5️⃣ Return on Assets (ROA)

- Formula: ROA = Net Income / Total Assets
- Caveat: ROA also does not consider borrowing costs, making it less accurate for companies with high levels of debt.
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More from @IAmOanaLabes

Oana Labes Profile picture
Jul 17
I financed companies for a living for 12 years.

Hundreds of millions of dollars funded in several industries.

Commercial banking gave me a masterclass in risk-return.

Read this thread to learn from my experience. Image
I worked with over 300 companies and just as many CFOs/Controllers/VP Finance & CEOs.

Everyone wanted access to cheap capital to finance their growth, so they could lower their cost of capital and avoid equity dilution.
But they all struggled to sell the bank on the opportunity to lend to their companies.

Because where they saw opportunity, the bank saw risk.
Read 14 tweets
Oana Labes Profile picture
Jul 16
EBITDA is flawed and unfit for most of the roles it has today.

So if you evaluating a company’s financial performance...

Don’t just use EBITDA. Image
🎯 EBITDA frequently gets adjusted to suit users individual needs and help mitigate their risks.

🎯 EBITDA needs replacing with a better profitability/cash flow measure that:

☑️ includes working capital investment

☑️ includes long term capital investment
☑️ includes payment obligations on debt

☑️ includes tax payment obligations

Here are 5 alternatives to EBITDA you can consider, depending on your business objectives:
Read 15 tweets
Oana Labes Profile picture
Jul 16
EBITDA vs. OCF vs FCF vs. FCFE

This is the ultimate Battle of the Cash Flows.  Let’s see if anyone actually wins. Image
1️⃣ EBITDA

⚫ Not a GAAP metric

⚫ Not a cash flow metric despite often being mistaken for one.

⚫ Discretionarily adjusted. Non-cash adjustments beyond Depreciation and Amortization are all the rage in quarterly calls and annual reports.
⚫ Ignores investment required for working capital assets and fixed assets, both of which can be sizeable uses of cash for growing companies. Not even going to mention how it ignores real uses of cash like interest and tax.

2️⃣ Operating Cash Flow (OCF)
Read 14 tweets
Oana Labes Profile picture
Jul 16
10 Uses for EBITDA you should be Aware of and Beware.
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is calculated just as the name implies:

E >> Earnings (Net Profit)

B >> Before (add back)

I >> Interest expense

T >> Tax expense

D >> Depreciation expense

A >> Amortization expense
EBITDA’s roots date back to 1980s when investment bankers were looking to increase the amount of debt they could add onto a corporate balance sheet, especially one which had substantial fixed assets.
Read 7 tweets
Oana Labes Profile picture
Jul 15
10 things you really need to understand about EBITDA.

1// “EBITDA” is essentially accounting (operating) profit with interest, taxes, depreciation, and amortization added back to it. Image
☑️It’s claim to fame is that it can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing, taxes, and accounting policy choices.

2// “Operating Cash Flow” or “OCF” is a flow measure of the amount of cash
generated by your business operations, calculated (indirectly) by adjusting net income for depreciation, amortization, and other non-cash expenses, as well as for changes in the balances of current assets and current liabilities.
Read 21 tweets
Oana Labes Profile picture
Jul 15
EBITDA vs. EVA vs. RI

Are your accounting profits sufficient to cover:

🎯 the opportunity cost of equity

🎯 the opportunity cost of debt

🎯 or both? Image
The short answer is:

❌EBITDA pays no rent.

⚫ RI pays explicit rent to shareholders.

✅ EVA pays rent to shareholders and debt holders.
The “rent” is the opportunity cost of capital required to get from Accounting Profit to Economic Profit.

➡️ If economic profit is positive, it means the company is generating returns above the opportunity cost of all resources used, not just the costs recorded on the books
Read 13 tweets

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