How do I analyze a company’s return on invested capital (ROIC)?

To analyze a company's Return on Invested Capital (ROIC), divide its Net Operating Profit After Taxes (NOPAT) by the total invested capital. ROIC measures how efficiently a company turns its capital into profits. A consistently high ROIC indicates strong operational efficiency, competitive advantages, and effective capital allocation—all crucial indicators of a high-quality business.

What is a good ROIC for a company?

A good ROIC is one that exceeds the company's cost of capital. For most industries, an ROIC above 12-15% is considered excellent. It indicates that the company is using its capital more efficiently than its peers. This often reflects strong pricing power, effective management, and sustainable business practices that can support long-term value creation for investors.

Why is ROIC better than ROE or ROA?

ROIC is superior to ROE and ROA because it considers the full capital structure—including both equity and debt—used to generate profits. While ROE focuses only on shareholder equity and ROA on assets, ROIC provides a more holistic view of how effectively the company uses all available resources. This makes it a better metric for comparing companies with different financing structures.

How do you calculate ROIC step-by-step?

Step 1: Calculate Net Operating Profit After Tax (NOPAT). Use the formula:
NOPAT = Operating Income × (1 - Tax Rate).

Step 2: Find Invested Capital, which is Total Assets minus Current Liabilities (excluding interest-bearing debt), or you can also use (Equity + Debt - Cash).

Step 3: ROIC = NOPAT ÷ Invested Capital.

This calculation helps you understand whether the company is using its capital productively to grow profits year after year.

What does a rising ROIC indicate?

A rising ROIC over several quarters or years suggests that a company is increasingly efficient in generating returns from its capital. This could be due to better pricing, improved cost controls, stronger demand, or innovation. Investors often interpret this as a sign of strengthening competitive position and future growth potential, making the stock more attractive.

How to use ROIC for investment decisions?

ROIC is a key metric for evaluating long-term value creation. Investors can compare a company's ROIC with its cost of capital (WACC). A consistently high ROIC signals that the business is not only profitable but also efficient. Use it alongside other metrics like earnings growth, cash flow, and market share to build a well-rounded investment thesis.