Definition
ROIC measures the return generated on all capital invested in the business—both equity and debt. It is considered the gold standard of profitability metrics because it captures how well management allocates capital. ROIC consistently exceeding the weighted average cost of capital (WACC) indicates genuine economic value creation.
functions Formula
ROIC = NOPAT / Invested Capital
lightbulb Example
NOPAT (net operating profit after tax) is $15M, and invested capital (equity + debt - cash) is $100M. ROIC = 15%. If WACC is 10%, the company creates 5% excess returns on every dollar invested.
verified_user Key Points
- The definitive metric for capital allocation quality
- ROIC > WACC indicates economic value creation
- Consistently high ROIC signals competitive moat
- Used by value investors to identify quality businesses