Re: ROIC
This is a great question and here we will take this opportunity to clarify for all ROC vs ROIC: ROC is Return on capital and meant to capture capital structure financial returns. It would be comparable to ROE and it IS supposed to include all stakeholders in the numerator as well: (Net Income... This is a great question and here we will take this opportunity to clarify for all ROC vs ROIC:

ROC is Return on capital and meant to capture capital structure financial returns.
It would be comparable to ROE and it IS supposed to include all stakeholders in the numerator as well:

(Net Income + Interest Expense) / (Debt + Equity)

Additional Clarifications:
- Do not subtract out dividends in the numerator: this is not a cash flow or IRR calculation per se
- Interest Expense is gross interest, do not include effects of interest income
- Both Debt and Equity in denominator are book value, not market values
- Denominator would be average capital, so average(Year 1 debt+equity, Year 2 debt+equity)

ROIC is Return on Invested Capital and meant to capture efficiency of its capital allocation.
As we discuss in class, do not rely on Investopedia definitions - they are flat out wrong.

ROIC formula =
NOPAT (Net Operating Profit After Tax, or in DCF language, Tax-Effected EBIT) divided by:
Net PPE + Net Intangibles + Net Working Capital

This would be more comparable to Asset Turnover (Sales/Assets) than ROE or ROC calculation.

Additional Clarifications:
- Use of NOPAT is similar to how ROA (NI / Assets) is technically not correct in that Assets are used to generate all CF, not just to Equity stakeholders and therefore, EBIT/Assets would be more appropriate but no one actually uses EBIT/Assets due to the over-emphasized importance on Equity returns
- In an ideal world, Invested Capital should also be average but people get lazy and use ending balance
- Net PPE is also known as Net Fixed Assets; depends on particular you want to be in including stuff like Construction in Progress
- Net PPE includes Land
- Net Working Capital, similar to a previous post of yours, does not include cash and debt, etc Read More

Why is Long Term Liabilities and LT Compensation included in changes in Working Capital?
I thought Working Capital encompassed only current assets-current liabilities

Re: Averaging When Mixing IS and BS Items
Generally speaking for comparison purposes, you would take the average BS when mixing IS and BS items in a ratio.
However, for financial modeling purposes, to avoid lumpiness in the projections, we use ending BS values for Working Capital drivers.

Re: Perpetuity Growth Method
This is the same reason that we encourage folks to use Tax-Effected EBIT instead of FCFF in the terminal value calculation using perpetual growth. The entire point of perpetual growth method is that it's only applicable for stable growth, mature, cash cow businesses. Therefore, in the long run, CapE... This is the same reason that we encourage folks to use Tax-Effected EBIT instead of FCFF in the terminal value calculation using perpetual growth. The entire point of perpetual growth method is that it's only applicable for stable growth, mature, cash cow businesses. Therefore, in the long run, CapEx and Depreciation net out (maintenance CapEx only, not growth CapEx) and thus Tax-Effected EBIT is normalized FCFF. Working capital requirements tend to be very little as well, although one can argue to include the effect of that as well, although we did not. This topic is covered more extensively in our Basic Financial Modeling and DCF Modeling course, including pros and cons of each approach. Read More

Re: Current liabilities
Yes, for purposes of calculating working capital from the finance perspective, we would definitely exclude cash from Current Assets and debt related items from Current Liabilities. Keep in mind that the Accounting definition would have us do a straight Current Assets / Current Liabilities.