Return on Invested Capital (ROIC)

Return on Invested Capital (ROIC) is a financial metric used to evaluate the efficiency of a company in generating profits from its capital investments. It is calculated by dividing the net operating profit after tax (NOPAT) by the total invested capital. The formula is:

ROIC = NOPAT / Invested Capital

Invested capital typically includes Equity, debt, and other forms of financing used to fund the company’s operations.

Example 1:

A company has a NOPAT of $500,000 and total invested capital of $2,500,000. The ROIC would be:

ROIC = $500,000 / $2,500,000 = 0.20 or 20%

Example 2:

Another company has a NOPAT of $1,200,000 and invested capital of $4,000,000. The ROIC calculation is:

ROIC = $1,200,000 / $4,000,000 = 0.30 or 30%

Case Study:

Company A consistently maintains an ROIC above its cost of capital (10%), indicating effective use of its capital to generate Returns. In contrast, Company B has an ROIC of 8%, suggesting it may not be utilizing its capital efficiently.