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What Is Return On Invested Capital?

what is return on invested capital

Definition of Return on Invested Capital (ROIC)

  • Return on invested capital is a method of calculation in which you measure the performance of a company in terms of profitability.
  • The ROIC is expressed in terms of percentages.
  • The ratio also helps you understand how efficient a company is at utilizing its capital to generate returns.
  • The more income generated from the investment, the more efficient the company is.
  • The ROIC is often benchmarked with other companies in the market.

What is the formula for ROIC?

  • To find the ROIC, you divide NOPAT by Invested Capital.

NOPAT ÷ Invested Capital

  • The NOPAT is the net operating profit after tax.
  • NOPAT can be calculated through the following formula:

EBIT x (1 – tax rate)

  • EBIT is the earnings before interest and tax.

ROIC in Practice

  • Tony wanted to open up a shop that sells shoes. Tony’s initial investment was $250,000. Tony’s shoe shop brings in a revenue of $100,000 and has expenses totaling to $40,000. The tax rate is 25%. What would the ROIC be?
  • 100,000 – 40,000 = $60,000 
  • 60,000 x (0.25) = $15,000
  • 60,000 – 15,000 = $45,000 
  • 45,000 ÷ 250,000 = 0.18
  • 0.18 x 100 = 18%
  • Therefore, Tony’s shoe shop has a ROIC of 18%.