# Archive for June 22nd, 2013

## Calculating Return on Invested Capital (ROIC)

Posted by mounddweller on June 22, 2013

I recently received a comment and question on my May 2013 Results posting.  Esa, from Finland, wanted to know how I would calculate my Return on Invested Capital (ROIC) and determine the total amount of capital used when I held multiple positions during the course of a month.  Below I provide ROIC and total amount of capital used calculations for three different scenarios. In Scenario #1 I am placing three different trades on the same day.  Let’s assume the following:

(1) each trade will be held for 30 days,

(2) each trade requires \$5,000 in capital,

(3) each trade generates a 1% ROIC net of all fees and expenses.

What is the total capital used?  In this scenario the answer is easy…\$15,000.  I had three trades, each requiring \$5,000 in capital.  The ROIC calculation in this scenario is also easy.  Each trade had an ROIC of 1% so my total ROIC must also be 1%.  My annualized ROIC is 12.17%.  This is calculated as follows:  [((0.01 x 365) / 30)].

Scenario #2 is a bit trickier.  In this scenario on the first day I place a trade requiring \$5,000 in capital.  Like in the previous scenario it is held for a period of 30 days.  10 days later I place a second trade.  It too requires \$5,000 in capital.  However, I only have this trade open 20 days.  10 days later I place my 3rd trade.  I hold it for 10 days and it also requires \$5,000 in capital.  Like before each trade generates a 1% ROIC net of all fees and expenses.

What is the total capital used?  The answer is \$10,000.  Here’s how I arrived at that number…[((5000*(30/30)+(5000*(20/30))+(5000*(10/30))))].  Trade D was held for 30 days, Trade E was held for 20 days, and Trade  F was held for 10 days.  Each required \$5,000 in capital.  What was my ROIC?  It was 1.5%.  Each trade generated a return of \$50.  Thus, to calculate the combined ROIC we simply divide the \$150 earned by the \$10,000 in average capital required to place the trades.  The annualized ROIC is calculated the same way as in Scenario #1.  [((0.015 x 365) / 30)].

What is the total capital used?  The answer is \$5,000.  I used the same capital 3 times during the month.  The ROIC is 3%, one percent for each of the three trades.  The annualized ROIC is 36.5%.  It is calculated as follows: [((0.03 x 365) / 30)].

So there you have it.  If anyone has another way of calculating returns please let me know.

Regards,

Troy

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