Return on Invested Capital (ROIC)

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Forbes  Apr 27  Comment 
Return on invested capital (ROIC) measures how much profit a company generates for every dollar invested in the company. It is the true measure of a company’s cash on cash returns.
Forbes  Feb 5  Comment 
Return on invested capital (ROIC) does a better job of explaining changes in shareholder value than any other metric, so why do investors, executives, and the financial media focus on reported earnings and other metrics such as EBITDA that ignore...




 
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Return on Invested Capital (ROIC) is used to judge how well companies generate earnings from capital invested in their business. It is essentially the return a company earns on each dollar invests in itself. ROIC is defined as Net Operating Profits Less Adjusted Taxes (NOPLAT) divided by the sum of Working Capital and fixed assets. Return on capital invested is a key driver of a business value (the higher it is, the higher the value) as it represents the return a company earns on its projects relative to its cost of capital.

ROIC = NOPLAT ÷ (Working Capital + Fixed Assets)


- Or -


ROIC = (EBIT * (1-T)) ÷ (Working Capital + Fixed Assets)


When a company's return on invested capital is greater than their cost of capital (commonly measured as the weighted average cost of capital, or WACC) they are creating value by investing in their projects. When this is not the case and company's WACC is greater than their ROIC they are said to be destroying value by investing capital in their business.

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