What is ROIC?
ROIC measures how efficiently a company uses investor money (debt and equity) to generate profits. It shows the percentage return on all capital invested in the business.
Think of it like this
You and a friend invest $10,000 in a food truck. If it generates $2,000 profit yearly, your ROIC is 20%. Compare this to a 2% savings account - the food truck is 10x better at generating returns!
Formula
ROIC = NOPAT / Invested Capital- NOPAT: Net Operating Profit After Tax
- Invested Capital: Total debt + equity - excess cash
Why it matters
- Shows management's capital allocation skills
- ROIC > WACC means value creation
- Consistent high ROIC indicates competitive advantage
- Better than ROE because includes debt
- Warren Buffett's favorite profitability metric
What's a good value?
< 5%
Poor
Destroying value
5-10%
Below Average
Not creating much value
10-15%
Average
Meeting expectations
15-20%
Good
Creating solid value
> 20%
Excellent
Strong competitive moat
Real-world example
Apple ROIC: 30% - exceptional capital efficiency. Utilities: 5-7% - capital intensive, regulated. Amazon: 15% - good for retail. Software companies: 20-40% - asset-light models.
Things to watch out for
- Capital calculations vary between sources
- Can be manipulated with financial engineering
- Compare within industries for best results
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