ROIC

ROIC, or return on invested capital, is a financial performance measure that evaluates how well a company uses the capital invested in its operations to generate profits. It is widely used by investors and managers to assess capital efficiency and to compare companies with different financing structures.

The typical formula is ROIC = NOPAT / Invested Capital. NOPAT stands for net operating profit after tax and is often approximated as EBIT times (1 minus the tax rate). Invested capital represents the capital that funds core operations and can be defined in several ways, most commonly as total equity plus debt minus cash and cash equivalents, or as total assets minus non-interest-bearing current liabilities. Other variants adjust for acquisitions, leases, or intangible assets.

ROIC is most informative when evaluated against the company’s weighted average cost of capital (WACC). If ROIC exceeds WACC, the company is creating value; if it falls short, value is eroded. The metric is also used in valuation, performance measurement, and capital-allocation decisions.

Limitations include definitional variation and potential distortion from non-operating assets, one-time items, or accounting choices. Comparisons require consistent calculation across periods and peers, and ROIC may be less meaningful for cyclical or high-growth industries where invested capital and operating profit fluctuate markedly.