My friend had advised me to wake up early on a Sunday so that I could see how I feel through out the day. I didn’t though. I forgot to set the alarm… as convenient as that.
I hope to spend my today revising what I studied during the past week, which is nothing more than the VA chapter. At 10:53, there is not much to studying, except I am all set to begin it.
Blogging and Updating my study sheet (maintained in excel) are part of my studying I feel. The time spent doing them are not clocked in in my sheet and that is perfectly logical since there is no Value Addition to my knowledge.
I had a doubt a few days back. In the module, there is a sentence which says ‘if we presume NOPAT is equal to Accounting Profit then, to maintain shareholder”s vlaue as positive or zero, Return on Capital employed (ROCE) has to be less than or equal to WACC.’ I believe this statement is wrong, however, one of my friend who is a CA believes it to be correct. He has sent me a little explanation on WhatsApp, which I do not seem to understand fully. I am going to delve deep into it and see if I can make sense of this.
As it turns out, I was right. The above sentence from the module is wrong after all. They have tried explaining the concept easily, but it is more repetition than substance. I found this great explanation from efinancemanagement.com. You may begin reading from Interpretation of Return on Capital Employed (ROCE).
“…if ROCE is greater than WACC, the company is creating value and the shareholders will remain invested in the company till this situation continues. If ROCE is less than WACC, it is destroying shareholder’s value.”
My friend still disagrees with me and as I write, he is trying to show me an example of how it is done. It is 12:30 and I haven’t begin studying. But finding truth was worth the exercise.