Lesson 4 of 8 · All lessons in this module
- Types of capital investments
- The capital allocation process and NPVVideo lesson
- IRR, and choosing between IRR and NPVVideo lesson
- Return on invested capital (ROIC)Video lesson
- Integrated case: three projects against a ROIC target
- Principles of capital allocation
- Capital allocation pitfalls
- Real optionsVideo lesson
Lesson 4 of 8 · 13 min
Return on invested capital (ROIC)
ROIC is the company-wide return on all the long-term capital management has invested, and outsiders can calculate it from published statements.
In short
- ROIC (also return on capital employed, ROCE) = after-tax operating profit ÷ average invested capital.
- Invested capital = long-term liabilities + equity; short-term liabilities (working capital) are left out.
- ROIC = after-tax operating margin × capital turnover: there are two paths to a high ROIC.
- Compare ROIC with a blended required return of debt and equity investors; ROIC above it over time means value creation.
- Limitations: it is accounting-based, backward-looking, can be volatile, is highly aggregated, and is measured in different ways.
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