Meaning
ROIC compares operating profit after tax with the capital invested in the business.
Formula
NOPAT / invested capital
Practical reading
ROIC above the cost of capital suggests the company may be creating value.
Calculation detail
NOPAT is operating profit after an estimated tax charge. Invested capital commonly combines interest-bearing debt and equity, less non-operating cash; providers can differ slightly in the exact definition.
What to check
A company generally creates value when its ROIC exceeds its weighted cost of capital over time. Watch the trend and compare it with asset-heavy peers rather than with every sector.
Limits and caveats
Acquisitions, goodwill write-downs and a temporary fall in invested capital can distort a single reported year.