Return on invested capital (ROIC) is the profitability or performance ratio. ROIC aims to measure the percentage return that investors in a company are earning from their invested capital. The ratio shows how efficiently a company is using the investors’ funds to generate income. Benchmarking companies use the ROIC ratio to compute the value of other companies.
Return on Invested Capital= Net Operating Profit After Tax / Invested Capital
- NOPAT (Net Operation Profit after Tax) = EBIT x Tax Rate = $1,000 * 5% = $950
- Invested Capital = Equity + Debt = $500 + $4,000 = $4,500
Result: Return on Investment Capital (ROIC) = 21.1%
A company is healthy and growing, if the ROIC greater than the cost of capital means. Thus, only if the ROIC lower than the cost of capital suggests a viable business model for a company.