Return on Invested Capital (ROIC)

What is ROIC? 
Return on Invested Capital (ROIC) is a profitability and performance metric that measures how effectively a company uses its invested capital to generate net operating profit. It helps answer the key question: 
"For every dollar invested, how much profit do we generate?"

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ROIC Formula: 
ROIC = NOPAT / Invested Capital

Where:
- NOPAT = Net Operating Profit After Tax 
- Invested Capital = All capital used in operations (equity + debt, net of excess cash)

A ROIC higher than your Weighted Average Cost of Capital (WACC) means you're creating value. 
ROIC < WACC = destroying value.

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PART 1 – Calculating NOPAT

Step 1: Start with EBIT 

• Revenue
• - Cost of Goods Sold (COGS)
• - Operating Expenses (SG&A, R&D, etc.)

→ = EBIT (Operating Profit)
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Step 2: Apply tax impact 

• NOPAT = EBIT × (1 – Tax Rate)
• This removes the effect of capital structure (debt vs. equity)

Example: 
- Revenue = $10,000,000 
- COGS = $6,000,000 
- Operating Expenses = $2,000,000 
- EBIT = $2,000,000 
- Tax Rate = 25% 
→ NOPAT = $2,000,000 × (1 – 0.25) = $1,500,000

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PART 2 – Calculating Invested Capital

Invested Capital includes:

• Net Working Capital = Current Assets – Current Liabilities
• Net Fixed Assets = Net PPE + Long-term Operating Assets

→ Invested Capital = NWC + Fixed Assets
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Exclude:

• Cash not required for operations
• Short-term investments
• Non-operating assets

Example:
- Current Assets = $3,000,000 
- Current Liabilities = $1,000,000 
→ NWC = $2,000,000 

- Net PPE = $5,000,000 
- Long-term Assets = $1,000,000 
→ Fixed Assets = $6,000,000 

→ Total Invested Capital = $2,000,000 + $6,000,000 = $8,000,000

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PART 3 – Calculating ROIC

Using the examples above:

• NOPAT = $1,500,000
• Invested Capital = $8,000,000

ROIC = 1,500,000 / 8,000,000 = 18.75%

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Why ROIC Matters

ROIC is the gold standard for measuring value creation:

• Shows return regardless of capital structure (debt/equity)
• Compares performance between companies, industries, or over time
• Aligns with shareholder value – higher ROIC = stronger long-term performance

Benchmarks:
- ROIC > 20%: Excellent 
- ROIC between 10–20%: Good, depending on industry 
- ROIC < WACC: Value destruction

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Real-World Application: Cable Manufacturing Example

Let's assume you run a cable plant.

Inputs:
- Annual EBIT = $4,000,000 
- Tax rate = 20% 
→ NOPAT = $4M × (1 - 0.20) = $3,200,000 

- Net Working Capital = $1,000,000 
- Net Fixed Assets (Machines, Equipment, Facility) = $6,000,000 
→ Invested Capital = $7,000,000 

ROIC = 3,200,000 / 7,000,000 = 45.7% ✅

This means for every $1 invested into your operations, you're earning $0.46 in profit – very efficient.

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Final Notes:

• ROIC removes accounting distortion by focusing on operations
• Helps identify bottlenecks in capital allocation
• Should be monitored monthly/quarterly along with KPIs like OEE, cash flow, and margin

Quote: 
"Earnings are an opinion, but cash is a fact." – Use ROIC to stay grounded.