Definition
ROIC measures how well a company generates returns on all capital (debt + equity) invested. It's compared to the weighted average cost of capital (WACC) to assess value creation. ROIC > WACC creates shareholder value; ROIC < WACC destroys value.
Formula
ROIC = NOPAT / Invested Capital = EBIT × (1-Tax Rate) / (Debt + Equity - Cash)
Example
With $50M NOPAT and $400M invested capital, ROIC is 12.5%. If WACC is 9%, the company creates 3.5% excess return on every dollar invested.
FAQ
What is Return on Invested Capital (ROIC)?
Operating profit relative to total capital invested in the business.
How do you calculate Return on Invested Capital (ROIC)?
A common formula for Return on Invested Capital (ROIC) is: ROIC = NOPAT / Invested Capital = EBIT × (1-Tax Rate) / (Debt + Equity - Cash)
Why is Return on Invested Capital (ROIC) important?
Return on Invested Capital (ROIC) helps investors evaluate profitability and make more informed decisions.