Why is return on invested capital (NOPLAT/invested capital) typically overstated in nominal terms and net PPE is understated in nominal terms. thank you!
PPE is carried on the books at book value so it will be understated. Example - let’s say that you have 3% inflation for 1 year. The same $100 piece of equipment now cost $103 to replace but is on the books at $100. For NOPLAT/Invested Capital the same applies for the denominator - Invested capital will have retained earnings that grow with inflation (as income is inflation adjusted) but the initial equity investment and older retained earnings are carried at historical values so again $100 in Noplat over say $100 in invested capital is now $103 (higher sales because of inflation is everything was the same over $100 in invested capital (assuming retained earnings dont change).