Switch to:
Zimmer Holdings Inc (NYSE:ZMH)
Return on Capital
11.44% (As of Dec. 2014)

Return on capital measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called Return on Invested Capital (ROIC). Zimmer Holdings Inc's annualized return on capital (ROC) for the quarter that ended in Dec. 2014 was 11.44%.

As of today, Zimmer Holdings Inc's weighted average cost Of capital is 10.10%. Zimmer Holdings Inc's return on capital is 10.94%. Zimmer Holdings Inc generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

Definition

Zimmer Holdings Inc's annualized Return on Capital (ROC) for the fiscal year that ended in May. 2014 is calculated as:

 Return on Capital (ROC) (A: May. 2014 ) = NOPAT / Average Invested Capital = Oper. Inc.*(1-Tax Rate) / ( (Invested Capital (A: Dec. 2013 ) + Invested Capital (A: May. 2014 )) /2) = 313.2 * ( 1 - 290.23% ) / ( (6162.5 + 7582) /2) = -595.80036 / 6872.25 = -8.67 %

where

 Invested Capital (A: Dec. 2013 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Total Equity - Cash = 1672.3 + 0.5 + 6297.3 - 1807.6 = 6162.5

 Invested Capital (A: May. 2014 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Total Equity - Cash = 5587.3 + 133.1 + 2109.2 - 247.6 = 7582

Zimmer Holdings Inc's annualized Return on Capital (ROC) for the quarter that ended in Dec. 2014 is calculated as:

 Return on Capital (ROC) (Q: Dec. 2014 ) = NOPAT / Average Invested Capital = Oper. Inc.*(1-Tax Rate) / ( (Invested Capital (Q: Sep. 2014 ) + Invested Capital (Q: Dec. 2014 )) /2) = 903.2 * ( 1 - 19.41% ) / ( (6470.7 + 6250.5) /2) = 727.88888 / 6360.6 = 11.44 %

where

 Invested Capital (Q: Sep. 2014 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Total Equity - Cash = 1426.4 + 250 + 6541.4 - 1747.1 = 6470.7

 Invested Capital (Q: Dec. 2014 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Total Equity - Cash = 1425.5 + 0 + 6520.8 - 1695.8 = 6250.5

Note: The Operating Income data used here is four times the quarterly (Dec. 2014) operating income data.

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Explanation

Return on Capital measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called Return on Invested Capital. The reason book values of debt and equity are used is because the book values are the capital the company received when issuing the debt or receiving the equity investments.

There are four key components to this definition. The first is the use of operating income rather than net income in the numerator. The second is the tax adjustment to this operating income, computed as a hypothetical tax based on an effective or marginal tax rate. The third is the use of book values for invested capital, rather than market values. The final is the timing difference; the capital invested is from the end of the prior year whereas the operating income is the current years number.

Why is Return on Capital important?

Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.

As of today, Zimmer Holdings Inc's weighted average cost Of capital is 10.10%. Zimmer Holdings Inc's return on capital is 10.94%. Zimmer Holdings Inc generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

Be Aware

Like ROE and ROA, ROC is calculated with only 12 months of data. Fluctuations in the companys earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective.

Related Terms

Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Zimmer Holdings Inc Annual Data

 Dec05 Dec06 Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13 May14 ROC 16.58 17.93 15.66 15.02 12.30 10.61 13.27 13.13 13.04 -8.67

Zimmer Holdings Inc Quarterly Data

 Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 May14 Jun14 Sep14 Dec14 ROC 10.74 14.86 10.38 10.40 15.70 14.78 0.00 23.99 11.31 11.44
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to \$400 per referral. ( Learn More)