ROIC (Return on Invested Capital): Definition and How to Calculate It
Return on Invested Capital (ROIC) measures how well a company turns invested capital into after-tax operating profits. It is a commonly used measure of business quality and capital efficiency.
Formula
Where NOPAT is net operating profit after tax and Invested Capital typically includes equity plus interest-bearing debt minus excess cash. Different implementations adjust for operating leases, capitalized R&D, and other items.
Why it matters
- ROIC helps compare companies across industries by showing how efficiently capital is deployed.
- ROIC above a company's cost of capital (WACC) generally indicates value creation; ROIC below WACC indicates value destruction. See WACC for discount rate context.
- Use consistent definitions for NOPAT and Invested Capital when comparing peers.
Implementation notes
- Start with operating income (EBIT) and apply an effective tax rate to get NOPAT.
- Calculate invested capital as total debt + total equity - non-operating cash (or use average invested capital over a period).
- Normalize one-offs and use the same treatment for peers when building comparisons.