3 min
01-August-2024
Multiple on invested capital or MOIC is a relevant measure when it comes to investing in instruments like mutual funds. Significantly, this is a measure that gives you information about your potential returns from your invested capital. Essentially, multiple on invested capital represents a ratio (you could say a “multiple") of money that is received or the money you may receive relative to the amount of money that you have invested. In terms of mutual fund schemes, if a mutual fund has invested Rs. 1 and received Rs. 4 on its initial investment, the multiple on invested capital of the said fund is 4x.
MOIC = Total Cash Inflows/Initial Investment
Where:
Total Cash Inflows = Proceeds from Sale + Dividends
= Rs. 5 lakh + Rs. 50,000 = Rs. 5 lakh 50,000 (Rs. 5,50,000)
Initial Investment = Rs. 1 lakh (Rs. 100,000)
MOIC = Rs. 5,50,000/1,00,000 = 5.5
In the example stated above, the MOIC is 5.5 which essentially means that for every rupee that the investor has invested, they received Rs. 5.50 in terms of cash inflows. This indicates that the investment made in the company has proved profitable for the investor as the return is 5.50 times the initial capital invested. Now, in case you wish to estimate your returns on your initial investment in a specific mutual fund scheme, you can predict it using the same formula or use an online mutual fund calculator to do so.
Bharat X Capital had originally invested in Voltage Tools and aided its growth. The announcement of the company reflects the significant return on investment. The MOIC = 10x portrays that the total inflows of cash from the acquisition amounted to 10 times the original investment, resulting in a substantially profitable outcome.
Where:
Total Cashflows represent the total amount of cash that is received from the initial investment made. This may include dividends, proceeds from an asset’s sale, or any other distributions. This represents any capital that investors have received during the lifetime of the investment.
Initial Investment refers to the initial sum of capital invested. The initial investment is the original cash outlay that the investor makes to buy the asset (or invest in it).
Furthermore, at different points in time, the Multiple on Invested Capital figure can provide a measure of the progress of the overall fund on a quarterly or yearly basis. In this way, limited partners can assess the development of a fund and take adequate steps to optimise the fund, if required.
For example, if the MOIC is 2.5, the investor has received 2.5 times their initial investment in cash inflows, demonstrating a profitable investment. MOIC is a straightforward metric that allows investors to easily assess the profitability and performance of an investment, making it a widely used measure in private equity, venture capital, and other investment analyses.
However, in general, an MOIC that is more than 1.0x the initial investment is viewed as a positive generation of returns. MOICs that are higher, those of 2.0x or above, suggest a more profitable or successful investment.
Another factor that is ignored by the Multiple on Invested Capital metric is the non-capital inflow an investor may receive. For example, the value of an investment may increase without a substantial generation of cash. Hence, this limits the accuracy of the MOIC reflecting the total return in certain cases. Related to this aspect of focusing only on the cash flows generated by an investment, MOIC does not include the qualitative features of the overall value of any investment.
As the Multiple on Invested Capital measure concentrates on returns that an investment may make, it does not account for any risk or volatility factors. For instance, there may be more than one investment you have with the same MOIC, but they may have different potential for risk.
MOIC is a quick and easy measure that does not consider time-weighted calculations.
MOIC is a rapid way to assess the potential of a specific investment, compare alternative investments, or measure the value-accretive capabilities of the general partner (GP).
The measure of MOIC is frequently used in venture capital, private equity, and investment analysis for the comparison of different investment instruments.
The Multiple on Invested Capital significantly contributes to capital allocation decisions and informed decision-making in investment.
If you want to explore investment in different instruments, particularly in mutual fund schemes, you can conveniently do so on the Bajaj Finserv Mutual Fund Platform. A smart and easy way to invest with knowledge-based decision-making offering 1000+ mutual funds so you find the appropriate plan for your individual investment requirements. You can be assured of a seamless investment experience right from making choices to actually investing in a scheme to match your unique preferences.
Essential tools for mutual fund investors
What is multiple on invested capital (MOIC)?
If you are investing in a particular mutual fund on a platform like the Bajaj Finserv Mutual Fund Platform, you may want to learn about some aspects of the returns on your investment in a particular mutual fund. It is natural to want to estimate the returns your mutual fund investment is likely to give you as this helps you to plan your financial goals. A key metric that is used to reflect the performance or the value of a mutual fund investment, relative to its initial investment, is the MOIC or multiple on invested capital. The MOIC is commonly used in the realm of private markets and is regularly employed to assess a fund’s potential for achieving returns. Often, this measure is referred to as the “equity multiple”.Examples of multiple on invested capital
Example #1
Let us say an investor invested Rs. 1 lakh in a technology startup two years ago. Over a period of two years, the startup has evolved substantially, seeing success. After two years, this startup wishes to go public and list itself on the stock market. Therefore, the startup wants to sell its shares to the public. After the startup has gone public, it has received Rs. 5 lakh from the sale of its shares. Furthermore, the company paid dividends worth Rs. 50,000 to its shareholders during a 2-year period. To calculate the MOIC, the following formula is used:MOIC = Total Cash Inflows/Initial Investment
Where:
Total Cash Inflows = Proceeds from Sale + Dividends
= Rs. 5 lakh + Rs. 50,000 = Rs. 5 lakh 50,000 (Rs. 5,50,000)
Initial Investment = Rs. 1 lakh (Rs. 100,000)
MOIC = Rs. 5,50,000/1,00,000 = 5.5
In the example stated above, the MOIC is 5.5 which essentially means that for every rupee that the investor has invested, they received Rs. 5.50 in terms of cash inflows. This indicates that the investment made in the company has proved profitable for the investor as the return is 5.50 times the initial capital invested. Now, in case you wish to estimate your returns on your initial investment in a specific mutual fund scheme, you can predict it using the same formula or use an online mutual fund calculator to do so.
Example #2
Say a company, Bharat X Capital (a private equity firm) announced the successful sale of Voltage Tools, a top provider of industrial services and tools. The company earned a 10x Multiple on Invested Capital (MOIC).Bharat X Capital had originally invested in Voltage Tools and aided its growth. The announcement of the company reflects the significant return on investment. The MOIC = 10x portrays that the total inflows of cash from the acquisition amounted to 10 times the original investment, resulting in a substantially profitable outcome.
Formula of MOIC
After you have asked the question, “What is multiple on invested capital?” and know the answer, the formula to calculate the MOIC may not be difficult to understand. These days, you can use online digital calculators to calculate metrics like MOIC, especially if you wish to invest in instruments like mutual fund schemes. However, it is important to know the way in which this calculation is made so that you are well-informed before you make any investment decisions. Here is the formula to compute the Multiple on Invested Capital:| MOIC = Total Cash Inflows/Initial Investment |
Where:
Total Cashflows represent the total amount of cash that is received from the initial investment made. This may include dividends, proceeds from an asset’s sale, or any other distributions. This represents any capital that investors have received during the lifetime of the investment.
Initial Investment refers to the initial sum of capital invested. The initial investment is the original cash outlay that the investor makes to buy the asset (or invest in it).
Why is the MOIC important in private equity?
The MOIC or Multiple on Invested Capital gives industry professionals and investors a metric that is easily understood and simple to calculate from reported amounts of capital. Additionally, the MOIC acts as a valuable reference figure to evaluate the investment ability of a general partner or make a comparison of different private equity funds.Furthermore, at different points in time, the Multiple on Invested Capital figure can provide a measure of the progress of the overall fund on a quarterly or yearly basis. In this way, limited partners can assess the development of a fund and take adequate steps to optimise the fund, if required.
How to calculate multiple on invested capital?
The multiple on invested capital (MOIC) is calculated by dividing the total cash inflows from an investment by the initial capital invested. The formula is simply MOIC = Total Cash Inflows / Initial Investment. The total cash inflows represent the sum of all cash received from the investment, including dividends, distributions, and proceeds from the asset's sale. The initial investment refers to the original amount of capital invested at the beginning. By dividing the total cash inflows by the initial investment, the MOIC ratio is calculated, indicating how many times the initial investment has been returned.For example, if the MOIC is 2.5, the investor has received 2.5 times their initial investment in cash inflows, demonstrating a profitable investment. MOIC is a straightforward metric that allows investors to easily assess the profitability and performance of an investment, making it a widely used measure in private equity, venture capital, and other investment analyses.
What is a good MOIC?
The Multiple on Invested Capital (MOIC) is a figure that is obtained to indicate the returns (if any) that an investment has generated. It may also indicate a loss of value in any investment. While talking about a “good” MOIC, it is difficult to say what is good as the MOIC varies from one industry to another. Furthermore, the MOIC that is generated for any given investment also depends on the investment strategy employed in making the investment.However, in general, an MOIC that is more than 1.0x the initial investment is viewed as a positive generation of returns. MOICs that are higher, those of 2.0x or above, suggest a more profitable or successful investment.
Limitations of MOIC
MOIC, although considered as an adequate measure of investment performance, has some limitations that you should consider. For instance, the Multiple on Invested Capital does not take the time value of capital into account. In other words, the metric does not consider that money that may be received at a future date may be less than the money you have currently. The MOIC works on the assumption that every inflow of cash is of equal value, no matter when it occurs. While you compare investments with varied time horizons, such a limitation may render the metric inaccurate.Another factor that is ignored by the Multiple on Invested Capital metric is the non-capital inflow an investor may receive. For example, the value of an investment may increase without a substantial generation of cash. Hence, this limits the accuracy of the MOIC reflecting the total return in certain cases. Related to this aspect of focusing only on the cash flows generated by an investment, MOIC does not include the qualitative features of the overall value of any investment.
As the Multiple on Invested Capital measure concentrates on returns that an investment may make, it does not account for any risk or volatility factors. For instance, there may be more than one investment you have with the same MOIC, but they may have different potential for risk.
Multiple on invested capital vs internal rate of return
There are two metrics that you may use to gauge the performance of your investment and attempt to estimate the returns you may receive. The Multiple on Invested Capital (MOIC) and the Internal Rate of Return (IRR) are often compared while considering calculations of investment returns. Here is a tabular comparison of the two metrics:Multiple on invested capital vs Total value of paid-in capital
Out of the two metrics that you may employ to evaluate the potential performance of your investment, the Multiple on Invested Capital (MOIC) and the Total Value of Paid-in-Capital are often compared while making calculations of investment returns. Here is a tabular comparison of these two indicators of an investment’s performance:Key takeaways
MOIC is an effective measure of how much value a private equity investment has generated/is generating. It is a metric that evaluates the profitability of an initial investment by comparing it with total inflows of cash.MOIC is a quick and easy measure that does not consider time-weighted calculations.
MOIC is a rapid way to assess the potential of a specific investment, compare alternative investments, or measure the value-accretive capabilities of the general partner (GP).
The measure of MOIC is frequently used in venture capital, private equity, and investment analysis for the comparison of different investment instruments.
The Multiple on Invested Capital significantly contributes to capital allocation decisions and informed decision-making in investment.
Conclusion
If you want to estimate your returns from any investment, including mutual fund schemes, the MOIC may be considered to suit your needs. Especially, when comparing mutual fund schemes, the Multiple on Invested Capital can make your decision-making process seamless as it helps you to gauge potential funds in terms of their performance. Although this is just one measure you can use while investing in mutual funds, there are other factors to consider, such as a fund’s past performance over time.If you want to explore investment in different instruments, particularly in mutual fund schemes, you can conveniently do so on the Bajaj Finserv Mutual Fund Platform. A smart and easy way to invest with knowledge-based decision-making offering 1000+ mutual funds so you find the appropriate plan for your individual investment requirements. You can be assured of a seamless investment experience right from making choices to actually investing in a scheme to match your unique preferences.
Essential tools for mutual fund investors
