Understanding companies
Return on invested capital, or ROIC, compares operating profit after tax with capital committed to operations. It asks how productively the business uses funding before owner-specific financing effects.
Make it click
Measure the output of a machine against all the money tied up to run it, regardless of whether that money came from owners or lenders. Definition choices decide which parts count.
Now put that into markets
ROIC often uses after-tax operating profit over average invested capital. Analysts compare it with the cost of capital to discuss value creation.
Invested capital may include equity and debt less non-operating cash, or operating assets less operating liabilities. Acquisitions, leases and intangibles require consistent treatment.
Rebuild the calculation rather than accepting a provider label. Track incremental returns on new capital as well as the mature base.
A high historic ROIC can fall as competition grows, and excluding acquired intangibles can flatter acquisitive companies. The estimated cost of capital is uncertain too.
Takeaway
