Return on Invested Capital (ROIC)
NOPAT (net operating profit after tax) divided by invested capital (equity + interest-bearing debt − cash). Capital-structure-neutral profitability metric — measures how efficiently the entire enterprise generates returns.
When to use: Use as the gold-standard profitability measure for cross-company comparisons. ROIC vs. WACC tells you whether a business creates or destroys value: ROIC > WACC = creates value; ROIC < WACC = destroys it.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| ROIC | Return on Invested Capital | NOPAT divided by invested capital | % |
| NOPAT | NOPAT | Net operating profit after tax = EBIT × (1 − Tax Rate) | $ |
| InvestedCapital | Invested Capital | Equity plus interest-bearing debt minus cash | $ |
Real-Life Examples
Example 1: Quality Industrial
NOPAT $500M. Invested capital (equity + interest-bearing debt − cash): $3,000M.
Given
Step-by-Step
16.7% ROIC. Against a typical 8-9% WACC, this business creates ~750bps of economic value spread per year — strong evidence of competitive advantage and durable returns. Sustained ROIC well above WACC is a hallmark of high-quality compounders.
Frequently Asked Questions
NOPAT (= EBIT × (1 − Tax Rate)) strips out interest expense, making the numerator capital-structure-independent. Pairs with the unlevered denominator (invested capital, not just equity) for an apples-to-apples cross-firm comparison.
Because excess cash is not invested in operations — it's a financial holding. Including it dilutes the operating-business return. The "operating invested capital" view is what ROIC is meant to capture.
Companies earning ROIC > WACC compound shareholder value; those earning ROIC < WACC destroy it (each new dollar invested loses value). The wider and more durable the ROIC − WACC spread, the higher the justified P/B and P/E multiples.