Danaher ROIC and ROIC-WACC spread analysis
danaher Return on Invested Capital (ROIC) & ROIC-WACC Spread
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Danaher (DHR) — ROIC & ROIC-WACC Spread (FY22–FY25)
| Metric ($M unless noted) | FY22 | FY23 | FY24 | FY25 |
|---|---|---|---|---|
| EBIT | 7,839 | 5,193 | 4,920 | 4,500 |
| Effective Tax Rate | 11.4% | 6.0% | 16.1% | 14.6% |
| NOPAT | 6,511 | 4,892 | 4,132 | 3,840 |
| Total Debt | 21,683 | 16,776 | 16,541 | 17,089 |
| Cash & Equivalents | 2,586 | 2,372 | 2,542 | 2,540 |
| Total Equity | 45,167 | 48,167 | 50,663 | 49,402 |
| Avg Invested Capital | 64,448 | 65,068 | 64,924 | 64,990 |
| ROIC | 10.1% | 7.5% | 6.4% | 5.9% |
Cost of Capital Build
| Component | FY22 | FY23 | FY24 | FY25 |
|---|---|---|---|---|
| Pre-tax Cost of Debt | 1.0% | 1.5% | 1.6% | 1.5% |
| After-tax Cost of Debt | 0.9% | 1.4% | 1.3% | 1.3% |
| Weight of Debt | 28.4% | 25.8% | 24.6% | 26.0% |
| Weight of Equity | 71.6% | 74.2% | 75.4% | 74.0% |
| Cost of Equity (CAPM, β=0.85) | 9.0% | 9.0% | 9.0% | 9.0% |
| WACC | 6.7% | 7.0% | 7.1% | 7.0% |
| ROIC – WACC Spread | +3.4% | +0.5% | –0.7% | –1.1% |
Key Observations
- Trend reversal: Danaher moved from a strong value creator (+340 bps spread in FY22) to a modest value destroyer (~–100 bps by FY25).
- Driver of decline: ROIC compressed ~420 bps over four years (10.1% → 5.9%), while WACC drifted up ~30 bps on a higher rate environment and slight re-leveraging.
- ROIC compression causes: EBIT fell from $7.8B (FY22) to ~$4.5B (FY25), reflecting post-COVID bioprocessing normalization and the 2024 Aldevron / Abcam integration drag, while invested capital stayed elevated near $65B.
- Capital structure: Debt/Equity has stayed modest (~26%), so spread pressure is almost entirely an earnings-side issue, not a leverage issue.
- Watch item: With WACC near 7% and ROIC near 6%, sustained earnings recovery (or capital redeployment) is needed to push spread back into positive territory.
Methodology Notes
- NOPAT = EBIT × (1 − effective tax rate), where effective tax = income tax expense ÷ pre-tax income.
- Invested Capital = LT Debt + ST Debt + Equity − Cash & Equivalents; averaged with prior year-end.
- Cost of Equity = Risk-free (4.3%) + Beta (0.85) × ERP (5.5%) = 8.975%, per standard CAPM.
- Cost of Debt = LTM interest expense ÷ avg debt; tax-shielded at the effective rate.
- WACC = wd × kd(after-tax) + we × ke, using book weights of debt and equity.
- Beta and risk-free/ERP assumptions are analyst inputs; substituting DHR's actual rolling beta (typically 0.80–0.95) shifts WACC by ~±25 bps but does not change the directional conclusion.
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