Question

NOPAT and FCF are likely of limited use in a vacuum (i.e., one year). Accordingly, explain why ROIC, MVA, and EVA—and the historical trends thereof—are important performance metrics in a financial analysis exercise.

Answer 1

The NOPAT or net operating profit after tax and FCF or free cash flows have limited use in one year while ROIC or return in invested capital, MVA or market value added and EVA or economic value added are important in financial analysis. The reason for this is that financial analysis takes the historical data into consideration and then plans for the future. Moreover unless there is some historical data it is not possible to compare and state whether the company has improved or suffered in managing its finances. Thus, historical data is needed as a point of reference for the analysis to be effective.