Return on Invested Capital (ROIC)

ROIC measures how well a company turns all the money invested in its business into profit, regardless of whether that money came from debt or equity. It is widely regarded as one of the best measures of business quality.

The numerator is usually net operating profit after tax, often called NOPAT: operating income adjusted for taxes. The denominator, invested capital, is typically equity plus debt, minus excess cash, or equivalently the operating assets the business uses.

For example, a company with operating income of 300,000 and a 25% tax rate has NOPAT of 225,000. If its invested capital is 1.5 million, its ROIC is 15%.

ROIC is especially useful when compared with the company's cost of capital. If ROIC is 15% and investors require 9%, the company is creating value with every unit it invests. If ROIC falls below the cost of capital, growth destroys value, because new investment earns less than it costs.

Definitions vary in the details, such as how leases, goodwill and cash are treated, so ROIC figures from different sources are not always directly comparable.