Return on Invested CapitalROIC
Return on invested capital measures after-tax operating profit relative to the capital invested in the business by both shareholders and lenders. A company whose ROIC is above its cost of capital is creating value.
Return on invested capital measures how much operating profit a company earns on all the money that lenders and shareholders have put into it. Analysts compare it with the cost of that capital to judge whether growth is creating or destroying value.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- Return on capital invested, Return on capital employed (related)
- Updated
ROIC in plain words
ROIC is the return a company earns across all the capital invested in it over a period, which you can compare with the return investors require.1
It covers the whole company and can be worked out from public data, so no inside information is needed.1
A ROIC above the cost of capital suggests the business earns more than its funders require; below it, growth can destroy value.
How to calculate ROIC
Find operating profit
For the pre-tax version, divide EBIT by average interest-bearing debt plus average shareholders' equity.2
Apply tax
For the after-tax version, multiply EBIT by (1 − effective tax rate) before dividing by the same capital base.2
Measure invested capital
Add average interest-bearing debt and average shareholders’ equity, the denominator in the CFA ratio list.2
Divide
Divide after-tax operating profit by invested capital to get the rate of return across all investments.1
Compare with required return
Set ROIC against investors’ required rate of return, the comparison CFA Institute highlights.1
Check the definition
Check each company's own definition — custom measures like this rarely match between firms.3
Worked examples
Example 1 — Basic ROIC
ROIC 10%A hypothetical firm has EBIT of $20m, a 25% tax rate, average debt of $50m and average equity of $100m.
| After-tax EBIT | $15m |
| Invested capital | $150m |
| ROIC | 10% |
Using EBIT × (1 − tax rate) over debt plus equity, as in the CFA ratio list, gives 10%.2
Example 2 — Above cost of capital
Value creatingA hypothetical retailer earns a 14% ROIC while investors require 9%.
| ROIC | 14% |
| Required return | 9% |
| Spread | +5 pts |
ROIC is above the return investors require, so the company is creating value.1
Example 3 — Below cost of capital
Value destroyingA hypothetical miner earns 4% ROIC with a 10% required return.
| ROIC | 4% |
| Required return | 10% |
Growth here likely destroys value, though ROIC is subject to limitations and assumptions worth checking.1
ROIC vs ROE
| Aspect | ROIC | Return on equity |
|---|---|---|
| Capital base | Debt plus equity | Equity only |
| Effect of leverage | Largely neutral | Boosted by debt |
| Profit measure | After-tax operating profit | Net income |
| Best for | Comparing businesses | Shareholder returns |
Where ROIC is used
Quality screens
Find firms that earn high returns, part of Fundamental Analysis.
Capital allocation
Judge whether new projects beat the cost of capital.
Leverage-neutral comparison
Compare firms with different Leverage.
Valuation
Link growth and returns to Price-to-Earnings Ratio multiples.
Advantages and disadvantages
Advantages
- Includes both debt and equity funding.
- Less distorted by leverage than ROE.
- Can be calculated from public accounts.
- Ties directly to value creation.
Disadvantages
- Definitions of invested capital vary.
- Accounting rules differ by country.
- Intangible investment is often expensed, not capitalised.
- One-off items distort single years.
Going deeper
Read as far as you need. Each level builds on the one before it.
The idea
Beginner
ROIC measures the return on all the money invested in the business.1 It answers how well management uses all the money it has been given.
Formula choices
Intermediate
The CFA ratio list gives pre-tax and after-tax versions; using averages of debt and equity smooths out balance-sheet changes during the year.2
Limits
Advanced
ROIC rests on assumptions and has limits.1 Leases, goodwill and capitalised research change the denominator, and accounting standards differ by country, so adjust before comparing firms. Some companies use their own version — Caterpillar, for example, divides after-tax operating profit by average invested capital.3
Common mistakes
Mixing definitions
Use the same formula across peers.
Ignoring the cost of capital
A 9% ROIC is weak if capital costs 11%.
Using one year
Average several years.
Forgetting goodwill
Acquisitions inflate invested capital.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- ROIC is operating profit over debt plus equity.
- Compare it with the cost of capital.
- It is less affected by leverage than ROE.
- Definitions vary, so be consistent.
- Accounting rules differ by country.
Frequently asked questions
What is a good ROIC?
Is ROIC the same as ROE?
Pre-tax or after-tax?
Further learning
- Fundamental Analysis
Where ROIC fits.
- Leverage
Why debt matters.
- Earnings
The profit side.
- Price-to-Earnings Ratio
Linking returns to valuation.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- CFA Institute. Capital Allocation (Refresher Reading) (opens in a new tab) Checked .
- CFA Institute. Financial Ratio List (CFA Program reading) (opens in a new tab) Checked .
- Caterpillar Inc. (SEC EDGAR filing). Exhibit 99.2 – Reconciliation of Non-GAAP Financial Measures: Return on Invested Capital (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.