Learn what return on invested capital measures and why investors use
Return on invested capital (ROIC) measures how effectively a company generates after-tax operating profit from the capital invested in the business. It is often used to judge whether the company is creating economic value.
ROIC matters because it compares operating performance with the capital required to produce it. A company can grow revenue quickly and still destroy value if it needs too much capital to do so and fails to exceed its cost of capital.
If a business earns strong operating profit after tax on a relatively modest invested-capital base, it will show a stronger ROIC than a rival that requires much heavier investment for the same result.
A manager says, “Any growth in invested capital is good if revenue rises too.”
Answer: No. Growth only creates value when returns on that capital are strong enough.
Return on Capital Employed: ROCE is a closely related capital-efficiency metric.
Return on Capital: ROIC sits inside the broader family of return-on-capital measures.
Weighted Average Cost of Capital (WACC): ROIC is often compared with WACC to judge value creation.