ROIC (Return on Invested Capital): Definition and How to Calculate It

Return on Invested Capital (ROIC) measures how well a company turns invested capital into after-tax operating profits. It is a commonly used measure of business quality and capital efficiency.

Formula

Where NOPAT is net operating profit after tax and Invested Capital typically includes equity plus interest-bearing debt minus excess cash. Different implementations adjust for operating leases, capitalized R&D, and other items.

Why it matters

  • ROIC helps compare companies across industries by showing how efficiently capital is deployed.
  • ROIC above a company's cost of capital (WACC) generally indicates value creation; ROIC below WACC indicates value destruction. See WACC for discount rate context.
  • Use consistent definitions for NOPAT and Invested Capital when comparing peers.

Implementation notes

  1. Start with operating income (EBIT) and apply an effective tax rate to get NOPAT.
  2. Calculate invested capital as total debt + total equity - non-operating cash (or use average invested capital over a period).
  3. Normalize one-offs and use the same treatment for peers when building comparisons.

Related terms