Return On Invested Capital - ROIC
Definition of 'Return On Invested Capital - ROIC'
A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns. Comparing a company's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively.
The general equation for ROIC is as follows:
Investopedia explains 'Return On Invested Capital - ROIC'
Total capital includes long-term debt, and common and preferred shares. Because some companies receive income from other sources or have other conflicting items in their net income, net operating profit after tax (NOPAT) may be used instead.
ROIC is always calculated as a percentage. Invested capital can be in buildings, projects, machinery, other companies etc. One downside of return on capital is that it tells nothing about where the return is being generated. For example, it does not specify whether it is from continuing operations or from a one-time event, such as a gain from foreign currency transactions.
To learn how to use ROIC for investment selection, please read Find Quality Investments With ROIC.