ROIC Calculator - Return on Invested Capital

What is the return on invested capital?

ROIC is one the most reliable indicators of investments' productivity, especially in the case of companies with a large amount of invested capital, such as mining companies or big manufacturing plants. However, you should be aware that it shows the overall return rather than the performance of individual assets. Based on ROIC alone, it's impossible to pick the investments that brought the most – or the least – profit.

The easiest way to learn about the profit generated from invested capital is to use the ROIC – return on invested capital. If this metric is high, it indicates that the company management is successful in generating revenues for the company and that the invested capital is being used efficiently. A low ROIC, on the other hand, might be a warning sign that the shareholders' money is being spent without an increase in revenues.

ROIC formula

The return on invested capital formula has two basic elements:

NOPAT – net operating profit after tax. It can be calculated from EBIT (earnings before interest and taxes) with the following equation:

Invested capital – a sum of all debt and equity on the balance sheet of a company.

To calculate ROIC, we need to divide NOPAT by the invested capital. You can write the return on invested capital formula in two forms:

or:

How to calculate ROIC?

Let's consider an example of a company that recently raised $100k in capital. The stakeholders wish to know how well the company is doing, so the company decides to calculate the value of the ROIC indicator.

First of all, the company in question needs to determine its NOPAT. They can calculate it by multiplying EBIT by 1 minus the tax rate. Let's assume that EBIT equals $50k and that the tax rate is 25%. Then:

Then, the company needs to sum up all the invested capital. Let's say they have no debts, and the capital from equity equals $121.5k.

Using the ROIC formula presented above, you can now calculate their return on invested capital:

As you can see, the ROIC equals 30.86%. Such a value indicates that the company is in excellent financial condition, but that value can be challenging to reach and retain. To get a better overview of the enterprise's performance, you should compare this metric to typical values from the industry and ask for the measurements from the last few years to check whether the company is developing.

If you are looking for other investment options, we recommend checking our systematic investment plan calculator.