What is considered a good ROIC?

It depends on the industry and cost of capital, but generally ROIC above 15 percent is considered strong. What matters most is that ROIC exceeds the company's WACC by a comfortable margin and that the level holds steady or improves over time.

How is ROIC calculated?

ROIC = NOPAT (net operating profit after tax) divided by invested capital. Invested capital is typically equity plus interest-bearing debt, or alternatively total assets minus non-interest-bearing operating liabilities.

Why is ROIC more informative than ROE?

ROE can be artificially improved by adding more debt without any real increase in value creation. ROIC accounts for the full capital structure and gives a more honest picture of how efficiently the business is run. That makes it harder to flatter and easier to trust.

Glossary

ROIC

The single metric that best measures whether a company is genuinely creating value with its capital — or merely cycling through it.

What it is

Capital that works

ROIC, Return on Invested Capital, measures how much profit a company generates per unit of invested capital. Unlike ROE, ROIC accounts for the entire capital base — not just equity — making it a more honest measure of whether management is creating or destroying value. A company with a 20 percent ROIC earns 20 pence for every pound of invested capital, year after year.

ROIC vs ROE: ROE can look impressive in a heavily leveraged company. ROIC accounts for the debt and gives a more honest picture of true capital efficiency.
The relationship to WACC: ROIC only creates value if it exceeds the cost of capital (WACC). The spread between ROIC and WACC determines whether the company is generating or destroying value.
ROIC and the moat: Companies that consistently maintain high ROIC over many years almost certainly have a strong economic moat. Sustained excess returns rarely happen by accident.

In practice

Sustained profitability is the test

A high ROIC in a single year can result from one-off factors. Sustained high ROIC, consistently well above the cost of capital over five, ten or fifteen years, is the real quality signal. Companies that meet this test can grow without raising external capital and compound value per share year after year. Declining ROIC is an early warning that competitive pressure is increasing or that growth has become more expensive to finance.

“We chase quality, not hope.”

Amos Fonder

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Common questions about ROIC

Related concepts

Glossary

Capital allocation

How a company chooses to deploy its earnings reveals more about management quality than almost anything else.

Margin of safety

The difference between a company's intrinsic value and its market price. The foundation of thinking about risk and asymmetric return.

Fair value

An estimate of what a stock is actually worth. Not what the market believes today, but what the company is worth based on its fundamentals.

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