Return on invested capital (ROIC) is a financial metric used to evaluate the efficiency and profitability of a company in utilising its invested capital to generate income. It provides insight into how effectively a company is deploying its capital to generate returns for its investors.
Return on invested capital is calculated using the following formula:
ROIC = Net operating profit after tax / Invested capital
ROIC specifically focuses on the return generated from the company’s core operations, excluding any financial leveraging or tax advantages.
If ROIC is higher than the cost of capital, it suggests that the company is generating returns in excess of its expenses, indicating positive value creation.
Companies with lower ROIC may have room for improvement in capital allocation, operational efficiency, or profitability. This metric can highlight areas for strategic focus.
Ultimately, a high ROIC is indicative of a company’s ability to generate value for its shareholders, which is a fundamental objective of any business.