ROIC, short for return on invested capital, shows how much profit a company earns on the money that has been put into running its business, whether that money came from shareholders or from lenders. The usual formula is NOPAT divided by invested capital. NOPAT is net operating profit after tax: the operating profit with taxes taken off, before any interest on debt. Invested capital is typically equity plus debt, minus the cash the business does not need to operate. Sources do not agree on the exact recipe. Some use net income instead of NOPAT, and some count cash or leases differently, so two websites can show different ROIC figures for the same company. Always check which version a source uses.
Worked example
Company B has an operating profit of $200,000 and pays tax at 25%, so NOPAT = $200,000 × (1 minus 0.25) = $150,000. It is financed with $700,000 of equity and $400,000 of debt and holds $100,000 of spare cash, so invested capital = $700,000 + $400,000 minus $100,000 = $1,000,000. ROIC = $150,000 ÷ $1,000,000 = 15%. Suppose the company's WACC, the average cost of its funding, is 9%. The gap is 15% minus 9% = 6 percentage points: on paper, each dollar invested earns more than it costs. If ROIC had been 7%, the same dollar would earn less than it costs.
Why it matters
ROIC answers a question that earnings alone cannot: how well does management turn the money entrusted to it into profit? Comparing ROIC with WACC is the common test of whether a business is creating value. A ROIC above WACC means each dollar invested earns more than it costs to fund; below it, growth can actually use up value. Unlike return on equity, ROIC is not flattered by borrowing heavily, because debt is counted in the denominator. The caveats are real: there is no single standard formula, the figure swings with accounting choices such as leases and one-off items, and capital-light businesses naturally show high numbers. A high or low reading is a question to look into, so compare it across several years and with companies in the same industry.
Frequently asked questions
The most common version is ROIC = NOPAT ÷ invested capital, where NOPAT is operating profit after tax and invested capital is equity plus debt minus surplus cash. Other sources use net income instead of NOPAT or count cash and leases differently, so check which version a site uses before comparing numbers.
Return on equity divides net income by shareholders' equity only, so a company that borrows heavily can show a high ROE. ROIC divides operating profit after tax by equity plus debt, so it shows how well the whole pool of money is used regardless of how it was funded.
Subtract WACC from ROIC. A positive gap means each dollar invested earns more than it costs to fund, a negative gap means it earns less. Treat it as a question to look into, and check it over several years rather than one.
Built & maintained by Worthmap · Last updated November 1, 2026
Educational use only. This tool provides estimates for informational purposes and does not constitute financial, investment, tax, or legal advice. Results are based on inputs you provide and mathematical models, they do not guarantee future performance. Always consult a qualified financial adviser before making investment decisions.