ROIC — Return on Invested Capital
The single best measure of business quality. How efficiently does the company generate profit from the capital invested in it?
What is ROIC?
ROIC (Return on Invested Capital) measures how much profit a company generates for every dollar invested in the business. It answers a simple question: Is management good at deploying capital?
A company with high ROIC can reinvest its profits at attractive rates, compounding value for shareholders over time. A company with low ROIC is destroying value — it's earning less than the cost of capital.
The formula
ROIC = Net Operating Profit After Tax / Invested Capital
Why it matters
ROIC is the clearest signal of business quality. A company that consistently earns high ROIC (15%+) has a durable competitive advantage — a moat that protects it from competition and allows it to earn above-average returns.
High ROIC companies can grow faster with less capital. They don't need to raise debt or dilute shareholders to fund expansion. They generate plenty of cash internally, which can be reinvested or returned to shareholders.
15%+
Excellent — strong moat
10-15%
Good — decent business
<10%
Poor — value destruction
How it's calculated
ROIC is calculated by dividing Net Operating Profit After Tax (NOPAT) by Invested Capital:
NOPAT (Net Operating Profit After Tax)
NOPAT = Operating Income × (1 - Tax Rate)
This is the profit the company generates from its core operations, after taxes but before interest expenses.
Invested Capital
Invested Capital = Total Equity + Total Debt - Cash & Equivalents
This is the money shareholders and debt holders have put into the business. Cash is subtracted because it's not deployed in operations.
PaybackPrice uses the average of the most recent 3 years of ROIC for stability, since a single year can be distorted by one-time events.
Example
Let's say a company has:
- Operating Income: $1,000 million
- Tax Rate: 25%
- Total Equity: $3,000 million
- Total Debt: $1,000 million
- Cash: $500 million
NOPAT = $1,000 × (1 - 0.25) = $750 million Invested Capital = $3,000 + $1,000 - $500 = $3,500 million ROIC = $750 / $3,500 = 21.4% ✓
This company earns 21.4% on every dollar invested — an excellent return that indicates a strong competitive advantage.
ROIC vs other metrics
ROIC is superior to other profitability metrics because it accounts for all capital — both equity and debt:
ROE (Return on Equity)
Only measures return on equity, ignoring debt. A company can boost ROE by taking on debt — which increases risk.
ROA (Return on Assets)
Measures return on all assets, including non-operating assets. Doesn't account for how those assets are financed.
ROIC (Return on Invested Capital)
Measures return on all capital invested in the business, regardless of financing. The purest measure of business quality.
How PaybackPrice uses it
ROIC is one of the Big 5 growth rates that PaybackPrice calculates for every stock. A company with 10+ years of ROIC above 15% passes the test — indicating a wonderful business worth further analysis.
See ROIC calculated for any US stock — free:
Analyze a stock free →