Return on Incremental Invested Capital (ROIIC)
Return on Incremental Invested Capital (ROIIC)
The return earned on the NEW capital invested over a period: the change in NOPAT divided by the change in invested capital. Where ROIC describes the whole capital base, ROIIC describes the marginal dollar, which is what growth actually earns.
When to use: Use to judge the quality of growth. A company can have a high historical ROIC while its recent investments earn far less; ROIIC exposes that. Measure over several years to smooth timing.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| ROIIC | ROIIC | Return on the capital added during the period | % |
| NOPAT0 | NOPAT, Start of Period | Net operating profit after tax at the start | $ |
| NOPAT1 | NOPAT, End of Period | Net operating profit after tax at the end | $ |
| IC0 | Invested Capital, Start | Invested capital at the start of the period | $ |
| IC1 | Invested Capital, End | Invested capital at the end of the period | $ |
Real-Life Examples
Example 1: High-Return Growth
NOPAT rose from $500M to $560M while invested capital rose from $3,000M to $3,300M.
Given
Step-by-Step
The $300M of new capital earned 20%, above the 16.7% the existing base earns. Growth is improving returns, not diluting them.
Example 2: Low-Return Growth
NOPAT rose from $150M to $156M while invested capital rose from $2,000M to $2,200M.
Given
Step-by-Step
New capital earned only 3%, far below any plausible cost of capital. The company would have been better off returning the $200M to shareholders.
Frequently Asked Questions
ROIC averages over all capital, old and new, so a large legacy base can hide poor recent investments for years. ROIIC isolates the recent decisions.
Then there is no incremental capital to earn a return on and the ratio is undefined; the formula returns an error. Any NOPAT change came from efficiency, not investment.