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Please answer and explain the following question. Nextime Ltd. has operating profits (EBIT) of $87 million,...

Please answer and explain the following question. Nextime Ltd. has operating profits (EBIT) of $87 million, a tax rate of 35%, net working capital of $129 million, and fixed assets of $285 million. Calculate Nextime’s return on invested capital, or ROIC. Then, describe three methods by which a firm can increase its ROIC.

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Answer #1

ROIC = EBIT(1-tax rate)/NWC+Fixed assets

=(87*(1-0.35))/(285+129)
=13.66%

The three ways in which ROIC can be increased are:

  • Increase in revenue which shall lead to an increase in operating income or EBIT.This shall also include trying to reduce costs. These cost can be for raw materials or administrative expenses.
  • Decrease in working capital requirements. Having a correct estimate of working capital required including inventory shall lead to money not being held up in undue and unproductive transition from raw material to finished goods
  • The use and buying of fixed assets shall be kept to the required and unnecessary capital shall not be held up in them. Decreasing fixed asset shall lead to a more return on assets and as well as ROIC.
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