Corporate Finance

Return on Invested Capital

One ratio tells you whether a business is a compounding machine or a capital furnace. Learn to compute it, read it, and act on it.

  • Intermediate
  • 6 min total
  • 10 chapters

What decision this helps you make: Which businesses (and divisions, and growth plans) deserve more capital, and which are earning less than their money costs.

What this topic is

Return on invested capital (NOPAT divided by the capital invested in operations) measures how much after-tax operating profit each dollar of deployed capital produces. Compared against the cost of capital, it's the cleanest verdict on whether a business creates or destroys value.

Why it matters

ROIC versus WACC is the spread that decides whether GROWTH is good news: high-ROIC businesses compound value with every reinvested dollar, while low-ROIC ones destroy value faster the faster they grow. It's the ratio serious investors check first.

Who should learn it

Owners deciding where to reinvest, executives ranking divisions, investors screening companies, and students connecting the income statement to the balance sheet.

What you will understand

  • Compute ROIC and compare it to the cost of capital
  • Decompose it: margins × capital turns (the DuPont logic)
  • See why growth only helps ABOVE the spread
  • Distinguish durable high ROIC (moats) from accounting mirages

Prerequisites

Common misconception

"Growth creates value." Only above the cost of capital. A business earning 6% ROIC against 9% WACC destroys ~3 cents per reinvested dollar. Growth makes it WORSE. The first question is never "how fast can we grow?"; it's "what do we earn on the next dollar in?"