ROIC Calculator

What is return on invested capital?

ROIC, short for return on invested capital, measures the after-tax operating profit a company earns on the capital put into its operations. Where return on equity looks only at shareholders' money, ROIC looks at the capital used to run the business and asks how much profit it produces.

The usual test is to compare ROIC with the company's cost of capital. If the business earns more on its capital than that capital costs, it is creating value; if it earns less, growth destroys value. This is why ROIC is a staple of equity analysis, alongside measures such as the price-to-earnings ratio.

The ROIC formula

ROIC = NOPAT ÷ invested capital × 100

NOPAT = EBIT × (1 − effective tax rate)NOPAT is net operating profit after tax. The tax rate is written as a decimal in the formula, for example 0.25 for 25%.

This calculator builds the capital figure from five inputs on the balance sheet:

invested capital = equity value + total debt − non-operating assets − cash

EBIT is operating profit before interest and tax. The effective tax rate is the share of that profit paid in tax. Invested capital is everything investors have put into the business, equity plus debt, minus what is not working in it: non-operating assets (holdings that do not support day-to-day operations, such as the net assets of discontinued operations) and cash that sits idle. All balance-sheet values are book values, not market values, so market expectations do not leak into the ratio.

Conventions differ. Some analysts leave idle cash in the capital base, and others treat only interest-bearing debt as capital. To follow a different definition, adjust the figures you enter: for example, enter 0 for cash to keep it in the base, or enter only the interest-bearing part of your debt.

How to use the calculator

1. Enter EBIT for the year.
2. Enter the effective tax rate as a percentage (at least 0.1).
3. Enter the equity value, total debt, non-operating assets and cash & equivalents, all from the balance sheet. Use 0 for any item that does not apply.
4. Press Calculate. ROIC appears as a percentage with up to three decimals.

If the capital figure comes out as zero or negative, the ratio is undefined and the calculator reports that it cannot compute ROIC. Recheck the inputs in that case.

Worked example

A company has EBIT of $320,000 and an effective tax rate of 25%. Its balance sheet shows equity of $1,400,000, total debt of $500,000, non-operating assets of $100,000 and cash of $200,000.

1. NOPAT = 320,000 × (1 − 0.25) = $240,000.
2. Invested capital = 1,400,000 + 500,000 − 100,000 − 200,000 = $1,600,000.
3. ROIC = 240,000 ÷ 1,600,000 × 100 = 15%.

If the same company kept its idle cash in the base, entering 0 for cash would give a capital figure of $1,800,000 and a ROIC of 240,000 ÷ 1,800,000 = 13.333%. Both readings are legitimate for different definitions; pick one and keep it for every comparison.

How EBIT drives ROIC

Holding the capital at $1,600,000 and the tax rate at 25%, ROIC rises in proportion to EBIT:

Shrinking the capital base lifts ROIC in the same way, whether through higher profit on the same capital or the same profit on less capital.

ROIC versus WACC

The weighted average cost of capital (WACC) is the blended return that lenders and shareholders require. The gap between ROIC and WACC is the company's economic spread. With a ROIC of 15% and a WACC of 9%, the spread is 6 percentage points of value created per dollar of capital each year. A negative spread means the business earns less than its capital costs. Estimate your own with the WACC calculator.

ROIC versus ROI

Return on investment (ROI) divides the gain on an investment by its cost. It can be applied to a single purchase, a project or a marketing campaign, and it may also count income that has nothing to do with core operations. ROIC is narrower: it looks at after-tax operating profit against the capital a whole business employs. Use the ROI calculator for individual decisions and ROIC for judging operating performance.

A related check is how much revenue a business needs before its costs are covered, which the break-even calculator answers.

Results are calculations from the figures you enter and are not investment advice. See our disclaimer.