Return on Invested Capital (ROIC)
Return on Invested Capital (ROIC)

See Also:
Return on Equity Analysis
Required Rate of Return
Return on Asset Analysis
Financial Ratios
Weighted Average Cost of Capital (WACC)
Return on Capital Employed (ROCE)

Return on Invested Capital (ROIC) Definition

The return on invested capital is the percentage amount that a company is making for every percentage point over the [Cost of Capital|Weighted Average Cost of Capital (WACC). More specifically the return on investment capital is the percentage return that a company makes over its invested capital. However, the invested capital is measured by the monetary value needed, instead of the assets that were bought. Therefore invested capital is the amount of long-term debt plus the amount of common and preferred shares.

Return on Invested Capital (ROIC) Formula

Use the following formula to calculate the Return on invested capital:
Net Operating Profit After Tax (NOPAT)/Invested Capital = ROIC
NOPAT – This is the operating profit in the income statement minus taxes. It should be noted that the interest expense has not been taken out of this equation.
Invested Capital – This is the total amount of long term debt plus the total amount of equity, whether it is from common or preferred. The last part of invested capital is to subtract the amount of cash that the company has on hand.

Return on Invested Capital (ROIC) Example

Bob is in charge of Rolly Polly Inc., a company that specializes in heavy agricultural and construction equipment. Bob has been curious as to how his company has been performing as of late and decides to look at the company’s return on invested capital analysis. Surprisingly, the company does not keep track of the return on invested capital ratio. Bob decides that he will go ahead and run the ROIC analysis, and obtains the following information:

Long-term debt – $25 million
Shareholder’s Equity – $75 million
Operating Profit – $20 million
Tax Rate – 35%
WACC – 11%

Plugging these numbers into the formula Bob finds the following:

$20 million – (20 million * 35%) = $13 million

$13 million/($25 milion + $75 million) = .13 or 13% = ROIC

To see how well the company is actually generating a return, Bob then compares the 13% to the WACC which is 11%. Thus, Bob find that the company is generating 2% more in profits than it cost to keep operations going.
If you want to be more valuable, then click here to download the Know Your Economics Worksheet.
return on invested capital (ROIC)
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]

return on invested capital (ROIC)

ARTICLES YOU MIGHT LIKE

The Accounting Gap Between Large and Small Companies

The Accounting Gap: It’s unfortunate, but true. A large gap exists between the accounting departments of large or publicly traded companies and smaller or private companies. In our past 25 years of consulting we’ve noticed that more often than not, these smaller/private companies will fill the gap with Bookkeepers, rather than the degreed Accountants/CPAs they

Read More »

The Struggles of Private Company Accounting

Building your Accounting Department… When I meet a business owner operating at a successful $10+ mil in revenue I often hear them say “My CPA…” and I immediately know they are referring to a tax CPA. One thing ALL entrepreneurs have in common is that they have to file a tax return. So from day

Read More »

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

August 7-10th, 2023

SHARE THIS ARTICLE
WIKI CFO® - Browse hundreds of articles