Transparent method
The formula
Worked example
Example inputs
How to interpret the result
ROIC on its own says nothing about whether the return is actually good. That judgment only comes from comparing it against the company's cost of capital, the return investors could get elsewhere at similar risk: a business earning an ROIC below its cost of capital is technically profitable and still destroying value with every dollar invested.
Before you rely on it
What to check
Compare the ROIC figure against a genuine cost-of-capital benchmark for the business, not against an arbitrary round number or a different company's unrelated ROIC.
The common error
Where people go wrong with return on invested capital calculator
Treating a positive ROIC as automatically good news. A positive return that sits below the actual cost of capital still represents value destruction, even though the number itself looks like profit.
Sensitivity evidence
How annual net income or operating profit changes the return on capital base
| Annual net income or operating profit | Return on capital base | Return above benchmark | Dollar profit above benchmark |
|---|---|---|---|
| $200,000 | 13.3% | 3.3% | $50,000 |
| $225,000 | 15.0% | 5.0% | $75,000 |
| $250,000worked example | 16.7% | 6.7% | $100,000 |
| $275,000 | 18.3% | 8.3% | $125,000 |
| $300,000 | 20.0% | 10.0% | $150,000 |
Every input, tested
Which input moves the return on capital base most
| Input | Tested from | To | Return on capital base at each end | Swing |
|---|---|---|---|---|
| Average asset, equity or invested-capital base | $1,350,000 | $1,650,000 | 18.5% to 15.2% | 3.4% (20%) |
| Annual net income or operating profit | $225,000 | $275,000 | 15.0% to 18.3% | 3.3% (20%) |
| Comparison return | 8.0% | 12.0% | 16.7% to 16.7% | none |
Two variables at once
Return on capital base by annual net income or operating profit and average asset, equity or invested-capital base
| Annual net income or operating profit \ Average asset, equity or invested-capital base | $1,200,000 | $1,500,000 | $1,800,000 |
|---|---|---|---|
| $200,000 | 16.7% | 13.3% | 11.1% |
| $225,000 | 18.8% | 15.0% | 12.5% |
| $250,000 | 20.8% | 16.7% | 13.9% |
| $275,000 | 22.9% | 18.3% | 15.3% |
| $300,000 | 25.0% | 20.0% | 16.7% |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Annual net income or operating profit | $250,000 |
| Average asset, equity or invested-capital base | $1,500,000 |
| Comparison return | 10.0% |
| Return on capital base | 16.7% |
| Return above benchmark | 6.7% |
| Dollar profit above benchmark | $100,000 |
Where the inputs come from
Annual operating profit for ROIC is usually net operating profit after tax, and the base is average invested capital: equity plus interest-bearing debt minus excess cash. This tool takes an operating profit figure and a capital base, so make sure the profit is after tax if you compare with an after-tax cost of capital. The benchmark is your weighted average cost of capital, the return investors require.
When the result stops applying
The measure depends on how invested capital is defined and how operating profit is taxed, and different analysts calculate it differently. It can be distorted by acquisitions, goodwill and leases. A high ROIC on a small base does not mean the business can absorb much more capital at the same return.
What to compare it with
See the ROA and ROE calculators for other bases, and the DuPont page for the equity view. The EBITDA margin and asset turnover pages show the drivers. The net present value and discounted cash flow calculators translate returns above the cost of capital into value.
People also ask
Frequently asked questions
What does ROIC tell me that ROE does not?
ROIC measures returns on all capital, debt and equity together, so it is not inflated by borrowing the way ROE can be.
What is a good ROIC?
One that clearly exceeds the company's cost of capital, often above 10% to 15% for good businesses. The gap over the cost of capital is what matters.
Should ROIC use pre-tax or after-tax profit?
After-tax operating profit, so it is comparable with the after-tax cost of capital. This tool uses whatever profit figure you enter.