Reading the accounts
Return on invested capital
Also called ROIC
Operating profit after tax as a percentage of all the capital invested in the business, debt and equity alike.
How it works
ROIC is the cleanest measure of business quality because it is not distorted by financing structure. It asks what return the operations earn on every pound put into them.
The number that matters is ROIC compared with the cost of that capital. A company earning above its WACC creates value as it grows; one earning below it destroys value the faster it grows.
Formula
ROIC = net operating profit after tax ÷ (total debt + equity − cash)Worked example
A company earning 18% ROIC against a 9% WACC is creating roughly 9 points of value on every unit of capital it deploys.
Related terms
- Return on equityNet income as a percentage of shareholders’ equity — profit earned on the owners’ capital.
- WACCThe blended cost of a company’s debt and equity funding, weighted by how much of each it uses.
- Economic moatA durable structural advantage that lets a company keep earning high returns without being competed away.
- Capital expenditureMoney spent buying or upgrading long-lived assets like property, equipment and technology.
- Economic profitProfit left after charging for the cost of the capital used to generate it.
Mentioned in
More in Reading the accounts
- Revenue
- Runway
- Owner earnings
- Share-based compensation
- Organic growth
- Tangible book value
- Operating margin
- Working capital
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.