Return on Invested Capital Calculator
Calculate the return on invested capital for a business using our online calculator. By inputting the net operating profit after tax (NOPAT) and the total invested capital, you can determine the ROIC as a percentage.
Understanding Return on Invested Capital
Calculating the return that a company accrued from the capital invested in its business is a useful means of assessing whether that company is prosperous. By comparing profit generated with the total money spent on resources to achieve that profit, a return on invested capital (ROIC) can be established.
A percentage is usually used for ROIC calculation, though sometimes a ratio may be used instead. A high metric shows that the company's operations are effective in generating revenues, indicating an efficacious application of invested capital. In contrast, a low ROIC can reveal there may be some underlying issues with shareholder investment not being applied effectively, and failing to result in any revenue increase. In assessing the relative efficacy of invested capital, ROIC can also be compared to WACC (Weighted Average Cost of Capital).
ROIC Formula
Calculating Return on Invested Capital is achieved by using the following formula:
Return on Invested Capital = NOPAT / IC
Where:
NOPAT represents net operating profit after taxes. Formula: EBIT × (1 − Tax Rate).
IC represents the invested capital. Formula: Short-Term Debt + Long-Term Debt + Shareholder Equity − Cash & Cash Equivalents − Goodwill
ROIC Calculation Case
In the event that a company has the following:
Earnings before interest and taxes of $400,000, tax rate of 40%, long-term debt of $700,000, short-term debt value of $800,000, shareholder equity of $10,000,000, cash and cash equivalents of $200,000, and goodwill of $100,000.
ROIC (%) = [ EBIT × (1 − Tax Rate) / (Short-Term Debt + Long-Term Debt + Shareholder Equity − Cash & Cash Equivalents − Goodwill) ] × 100
Return on Invested Capital (ROIC, %) = [ $400,000 × (1 − 0.4) / ($700,000 + $800,000 + $10,000,000 − $200,000 − $100,000) ] × 100 = 2.14%
According to the result of this calculation, the company's ROIC is 2.14%.
what is Return on Invested Capital
Return on Invested Capital (ROIC) is a financial metric that measures the profitability and efficiency of a company's use of its invested capital. It provides insight into how effectively a company generates profits from the capital invested by both shareholders and lenders.
ROIC is calculated by dividing a company's Operating Income (earnings before interest and taxes, or EBIT) by its Invested Capital. Invested Capital represents the total amount of capital employed in a company and includes both equity and debt financing. The formula to calculate ROIC is as follows:
ROIC = Operating Income / Invested Capital
Operating Income is the company's earnings before taking into account interest expenses and taxes. Invested Capital is the sum of equity (common stock, retained earnings) and debt (long-term liabilities such as loans, bonds, and lines of credit) used to finance the company's operations.
The resulting ROIC figure is expressed as a percentage or ratio. A higher ROIC indicates that the company is generating more profit per unit of invested capital, signaling efficiency and effectiveness in capital utilization.
ROIC is a valuable metric because it considers both debt and equity financing, providing a comprehensive measure of the return generated from all sources of capital. It helps evaluate a company's ability to generate profits and create value for investors and lenders.
The interpretation of ROIC varies across industries and should be compared to industry benchmarks and historical performance. Generally, a higher ROIC is desirable and indicates a more productive use of capital. A lower ROIC may suggest inefficiencies or potential problems with capital allocation or operational performance.
ROIC can be used to assess the performance of individual companies over time, as well as to compare the performance of different companies within the same industry. It helps investors and analysts make informed investment decisions by evaluating a company's profitability and capital efficiency relative to its peers.
It's important to note that ROIC is just one metric among many that should be considered when analyzing a company's financial health and investment potential. Additionally, it's crucial to conduct a thorough analysis of the company's financial statements, industry dynamics, competitive positioning, and other relevant factors before making any investment decisions.
Return on Invested Capital example
Certainly! Here's an example of using a table to calculate the Return on Invested Capital (ROIC) for different companies:
| Company | Net Operating Profit After Tax (NOPAT) | Invested Capital | Return on Invested Capital (ROIC) |
|---|---|---|---|
| Company A | $500,000 | $2,000,000 | 25% |
| Company B | $1,000,000 | $5,000,000 | 20% |
| Company C | $1,500,000 | $8,000,000 | 18.75% |
In this example, we have three different companies with their respective Net Operating Profit After Tax (NOPAT) and Invested Capital. We also calculate the Return on Invested Capital (ROIC) for each company.
To calculate the ROIC, you can use the formula:
ROIC = (NOPAT / Invested Capital) * 100
For instance, for Company A with a NOPAT of $500,000 and an Invested Capital of $2,000,000, the ROIC would be 25%.
Similarly, using the same formula, you can calculate the ROIC for Company B and Company C based on their respective NOPAT and Invested Capital mentioned in the table.
The Return on Invested Capital (ROIC) is a financial metric that measures the profitability and efficiency of a company's capital investments. It indicates the return generated by the company relative to the amount of capital invested in its operations. A higher ROIC generally suggests that a company is generating more profits from its invested capital. Comparing the ROIC of different companies can help assess their financial performance and their ability to generate returns for investors.
