Long-term investing
Return on invested capital (ROIC)
Definition
After-tax operating profit ÷ the debt plus equity used in the business. Company A: $380 million ÷ $2.0 billion = 19%. Analysts define it slightly differently, so compare companies with the same formula.
Example
Say company XYZ has $200 million of operating profit, a 25% tax rate and $1 billion of capital: $400 million of debt plus $600 million of equity. After tax, that profit is $150 million, so ROIC is $150 million ÷ $1 billion = 15%. Against an 8% cost of capital, growth at that return creates value, while a rival earning 6% against the same 8% destroys value as it grows.
Hypothetical numbers, for illustration only.
UpTickFlow is our product. These guides are education, not financial advice. Trading involves a substantial risk of loss.