Return on capital

Return on capital

Return on invested capital (ROIC) is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as Net operating profit less adjusted taxes divided by Invested Capital and is usually expressed as a percentage. In this calculation, capital invested includes all monetary capital invested: long-term debt, common and preferred shares.

When the return on capital is greater than the cost of capital (usually measured as the weighted average cost of capital), the company is creating value; when it is less than the cost of capital, value is destroyed.

Basic formula

*ROIC = (Net Operating Profit Less Adjusted Taxes)/(Invested Capital)

Note that the numerator in the ROC fraction does not subtract interest expense, because demoninator includes debt capital.

See also

*Cash flow return on investment (CFROI)
*Cash return on gross investment (CROGI)
*Rate of profit
*Tendency of the rate of profit to fall
*Return on assets (ROA)
*Return on equity (ROE)
*Return on capital employed (ROCE)
*Return on investment (ROI)
*Return on net assets (RONA)
*Return on revenue (ROR), also Return on sales (ROS)
*Risk adjusted return on capital (RAROC)

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