Return on Invested Capital (ROIC)

What is Return on Invested Capital (ROIC)?

Return on Invested Capital (ROIC) is a financial metric used to measure how efficient a business is in generating profits from its long-term capital investments net of taxes for each unit of capital invested. The calculation can help investors decide whether to invest in a stock or business.

ROIC measures how much profit a business generates from its invested capital. It measures a company's ability to maximize the amount of money it receives from its investments. This metric puts a dollar number on the efficiency of a business and makes it easy to compare it to other businesses or its own historical performance.

How to Calculate Return on Invested Capital (ROIC)

Return on Invested Capital (ROIC) is calculated as:

ROIC=Net Income−DividendsAverage Invested Capital−Excess Cash\text{ROIC} = \frac{\text{Net Income} - \text{Dividends}}{\text{Average Invested Capital} - \text{Excess Cash}}

where:

  • Net Income is the net income after taxes, as reported on the income statement
  • Dividends is the amount of dividends paid out
  • Average Invested Capital is the average capital used for investing, including interest-bearing liabilities such as debt
  • Excess Cash is the amount of money held either in a company's accounts or invested in short-term, low-yielding investments

An alternative and commonly used formula is:

ROIC=NOPATInvested Capital\text{ROIC} = \frac{\text{NOPAT}}{\text{Invested Capital}}

where NOPAT (Net Operating Profit After Taxes) is operating income multiplied by (1 - tax rate), and invested capital is total equity plus total debt minus excess cash.

ROIC Calculator

Calculate a company's return on invested capital:

ROIC Calculator

Frequently Asked Questions

What is a good ROIC?
A good ROIC is generally above the company's weighted average cost of capital (WACC). As a rule of thumb, a ROIC above 15% is considered strong. Companies that consistently generate ROIC above their cost of capital are creating value for shareholders.
What is the difference between ROIC and ROE?
ROIC measures the return on all invested capital, including both equity and debt, while ROE only measures the return on shareholders' equity. ROIC gives a more complete picture of how efficiently a company uses all the capital available to it.
Why do value investors focus on ROIC?
Value investors use ROIC to identify companies with durable competitive advantages. A consistently high ROIC suggests the company has a moat that allows it to generate above-average returns on the capital it invests, which often leads to superior long-term stock performance.
Can ROIC be negative?
Yes. A negative ROIC means the company is destroying value because the returns on its invested capital are less than zero. This is a serious warning sign for investors.
What is the ROIC vs WACC relationship?
ROIC compared to WACC is the key value creation test. If ROIC exceeds WACC, the company creates economic value for shareholders. If ROIC is below WACC, it destroys value. The wider the spread (ROIC minus WACC), the more value the company creates per dollar of capital invested.
How does ROIC differ from ROCE?
ROIC uses after-tax operating profit (NOPAT) and is measured on invested capital (equity + debt - cash). ROCE uses pre-tax operating profit (EBIT) and is measured on capital employed (total assets - current liabilities). ROIC is generally preferred for cross-company comparisons because it accounts for tax rate differences.
Romain Simon
Written by Romain Simon

Founder of Beanvest. Self-directed investor since 2015, building tools to help individual investors make better decisions.

Last updated: March 24, 2026| Editorial process
All definitions