Return on Invested Capital

Return on Invested Capital (ROIC) is a very important financial metric. It is used to measure your 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.

ROIC is a measure of your operational performance (in a sense of cash flow from operations); Therefore, it is measured by dividing your NOPLAT by your invested capital.

Your effective tax rate, obviously. Invested capital represents the total cash investment that your shareholders and debtholders have made into your company and is usually calculated in two ways:

In operating approach, investment capital (IC) is operating net working capital + net property, plant & equipment + capitalized operating leases + other operating assets + operating intangibles − other operating liabilities − cumulative adjustment for amortization of R&D.  

In financial approach, IC is total debt and leases + total equity and equity equivalents − non-operating cash and investments. Both must obviously yield the same number which allows to balance invested capital calculation form in your corporate financial valuation model.  

ROIC is important because it allows to determine whether your business makes economic sense (FCF determines whether it makes financial sense) and whether it creates or destroys financial value.

If ROIC exceeds your WACC (this difference is called economic profit), then your business creates value and thus makes economic sense; if it does not, value is destroyed and your business makes no economic sense.