ROIC return on invested capital
ROIC measures the return a company earns on all the capital it employs, whether it comes from shareholders or lenders. Set against the WACC, it answers the decisive question of whether the company creates or destroys value: it only creates value when ROIC sustainably exceeds its cost of capital. For many investors it is the single best indicator of business quality.
How it is calculated
| EBIT | €200M | |
|---|---|---|
| NOPAT, after a 25 % tax rate | €150M | |
| ÷ invested capital | €1,000M | |
| ROIC | 15 % | |
| WACC to compare with | 8 % | |
| Difference: value created | 7 points |
ROIC = NOPAT ÷ invested capital. NOPAT is operating profit after tax: with EBIT of €200M and a 25 % rate, that is €150M. Invested capital is what the business needs to run (equity plus financial debt, less cash it does not need): say €1,000M. ROIC comes out at 15 %. The figure alone says nothing; what informs is comparing it with WACC. With a WACC of 8 %, those 7 points of difference are value created per euro invested. If ROIC were below WACC, the company would destroy value by growing, and growing would be exactly the worst thing it could do.
The figures in the example are invented and rounded so the arithmetic can be redone by hand. They are not data from any real company.
What it is not
It is not ROE. ROE is measured on equity, so it rises on its own with leverage: a company can have a spectacular ROE and a mediocre ROIC simply by being heavily geared. ROIC looks at all the capital, wherever it came from, which is why it is the one that tells you whether the business is good. And it does not compare across sectors: software with no factories has little invested capital and very high ROIC by construction, against heavy industry.
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Definition for informational purposes. It is not financial advice nor a recommendation to buy or sell.