Return on invested capital
ROIC
Return on invested capital measures the after-tax operating profit a company earns on the capital tied up in its operations. Compared with WACC, it shows whether growth creates value or destroys it.
Formula
NOPAT
NOPAT = Operating Profit (EBIT) × (1 − Tax rate)
Invested capital
Invested Capital = Equity + Borrowings − Cash and investments not needed to run the business
ROIC
ROIC (%) = NOPAT ÷ Invested Capital × 100
Benchmark: Above WACC creates value; below WACC destroys it
Variables
| NOPAT | Net operating profit after tax: operating profit as if the company had no debt |
| Operating Profit (EBIT) | Profit before interest and tax, excluding other income such as interest on surplus cash |
| Invested Capital | The money tied up in running the business, however it was financed |
Finding the inputs
Operating profit from the profit and loss statement, with other income taken out. The effective tax rate from the tax note. Equity, borrowings, cash and current investments from the balance sheet. When capital changes a lot during the year, use the average of the opening and closing figures.
Reading the number
ROIC asks how much the operating business earns on the money tied up in it, after tax, regardless of how that money was raised. It differs from ROCE in two ways: it uses profit after tax, and it leaves out surplus cash, which earns interest but is not part of the operations.
The number matters most next to WACC. The gap between them is the spread. When ROIC is above WACC, every rupee the company reinvests earns more than it costs, so growth adds value. When ROIC is below WACC, growth destroys value, even though profits rise. That is why revenue growth on its own says little about whether a company is getting more valuable.
A high ROIC that lasts for many years is the clearest financial sign of a competitive advantage. Read the trend over five to ten years, not one year.
Illustrative example
Related ratios
From the research
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