ROIC − WACC Spread
ROIC − WACC Spread
Return on invested capital minus the weighted average cost of capital: the value created per dollar of capital employed. Positive means every dollar invested earns more than it costs; negative means growth destroys value.
When to use: Use as the single most direct test of whether a business should grow. A wide positive spread justifies reinvestment; a negative spread argues for returning capital instead.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| Spread | ROIC − WACC | Excess return over the cost of capital | % |
| NOPAT | NOPAT | Net operating profit after tax | $ |
| InvestedCapital | Invested Capital | Equity plus interest-bearing debt employed in the business | $ |
| WACC | WACC | Weighted average cost of capital, as a decimal | % |
Real-Life Examples
Example 1: Value Creator
NOPAT $500M on $3,000M of invested capital; WACC 9%.
Given
Step-by-Step
Each dollar of capital earns 7.7 cents more than it costs. Reinvesting at this spread grows value; this is the engine behind compounding businesses.
Example 2: Value Destroyer
NOPAT $150M on $2,000M of invested capital; WACC 10%.
Given
Step-by-Step
A negative spread: the business earns 2.5 points less than its capital costs. Every dollar reinvested here is worth less than a dollar.
Frequently Asked Questions
A 12% ROIC is excellent for a utility with a 6% WACC and poor for a venture with a 15% WACC. Only the spread says whether capital is being used well.