I'm reading text book that introduces some financial concepts, all of which are really new to me. I'm reading a passage on Return on Investment Capital. In this passage, they try to demonstrate ROIC with an example, and the example cites a Company A that has the following details:
In year 1, Company A has
- Revenues: $1000
- Earnings: $100
- Investment: ($25)
- Therefore, Cash Flow is : $75
These details suggests the following relationship between these key terms:
Earnings = Revenues - All Costs - Taxes
Cash Flow = Earnings - Investments
My confusion is that I currently understand that Earnings is defined as:
Cash Flow = Earnings = Revenues - Investments - All Costs - Taxes
I have this understanding because i read the following:
Cash Flow = the total amount of money being transferred into and out of a business.
Earnings = Earnings are the amount of profit that a company produces during a specific period
Can anyone help me clear up my understanding of these terms so that I can go on to understand what ROIC is?