ROIC (return on invested capital)

ROIC (Return on Invested Capital) measures the return a company generates on all the capital mobilised to finance its operations. It is calculated by dividing operating profit after tax, or Net Operating Profit After Tax (NOPAT), by invested capital, that is the sum of equity and net financial debt less non-operating cash.

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ROIC answers a simple question: does each unit of capital tied up in the business earn more than its cost of financing? The relevant comparison is ROIC against the Weighted Average Cost of Capital (WACC): a ROIC durably above WACC signals economic value creation, whereas a ROIC below it destroys value, whatever the growth on display. This indicator is therefore central to assessing the quality of a business in business valuation.

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Consider a company generating 3 MCHF of NOPAT on 25 MCHF of invested capital, a ROIC of 12%. Against a WACC of 8%, the 4-point gap reflects genuine value creation; were the cost of capital 14%, the same activity would destroy value despite a positive result.

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ROIC differs from ROCE – Return on Capital Employed: definition and formula in its base: ROIC works from NOPAT and net invested capital, while ROCE relates operating profit to capital employed. Both ratios are read across several years and on a sector basis, since capital intensity varies widely from one activity to another.