Understanding Return On Invested Capital (Roic) With Examples

Introduction

Return on invested capital (ROIC) is a financial metric that measures the amount of return a company generates on the capital it has invested in the business. It is a key indicator of a company’s financial performance and a measure of how efficiently it uses its capital. In this article, we will discuss ROIC in detail, including how it is calculated and what it signifies. We will also provide some examples to help you understand its importance.

What is Return on Invested Capital (ROIC)?

ROIC is a financial performance metric that measures the return a company earns on the capital it has invested in the business. It is calculated by dividing the company’s after-tax operating income by its invested capital. Invested capital includes all the capital that a company has put into the business, such as debt and equity.

ROIC Formula

ROIC = After-tax Operating Income / Invested Capital

Why is ROIC Important?

ROIC is important because it provides insight into a company’s financial performance and its ability to generate returns. A company with a high ROIC is more efficient in generating returns on its invested capital than a company with a low ROIC. High ROIC can also indicate that a company has a competitive advantage in the market.

ROIC Examples

Let’s take a look at some examples of ROIC to better understand how it works.

Example 1

Company A has an after-tax operating income of $10 million and an invested capital of $50 million. Its ROIC can be calculated as follows: ROIC = $10 million / $50 million = 0.20 or 20% This means that Company A generates a return of 20% on its invested capital.

Example 2

Company B has an after-tax operating income of $5 million and an invested capital of $100 million. Its ROIC can be calculated as follows: ROIC = $5 million / $100 million = 0.05 or 5% This means that Company B generates a return of 5% on its invested capital.

Example 3

Company C has an after-tax operating income of $15 million and an invested capital of $75 million. Its ROIC can be calculated as follows: ROIC = $15 million / $75 million = 0.20 or 20% This means that Company C generates a return of 20% on its invested capital.

Conclusion

ROIC is an important financial metric that measures a company’s ability to generate returns on its invested capital. It is an effective way to evaluate a company’s financial performance and efficiency. By using ROIC, investors can make better investment decisions and companies can improve their financial performance.

People Also Ask (PAA)

Q: What is a good ROIC? A: A good ROIC varies by industry, but generally a ROIC that exceeds the company’s cost of capital is considered good. Q: How do you increase ROIC? A: Companies can increase ROIC by improving their operating efficiency, increasing revenue, reducing costs, and optimizing their capital structure. Q: What is the difference between ROIC and ROI? A: ROIC measures the return on invested capital, while ROI measures the return on investment. ROIC takes into account the capital invested in the business, while ROI does not.