ROIC Calculator – Return on Invested Capital
This ROIC calculator is a tool that helps you determine the return on invested capital (or ROIC for short). Generally speaking, this business indicator measures how profitable a company is in investing the money it obtains from its shareholders.
If you are interested in this topic or are trying to assess what return on investment you can expect as a shareholder, be sure to scroll down and read the full article. You will find a complete ROIC formula and a detailed explanation of how to calculate the ROIC metric for any company.
What is the return on invested capital?
Most enterprises out there don't rely on operating income to cover all of their costs and generate profit; instead, they work with external capital in the form of debt (borrowed money) and equity (value of assets).
Naturally, investors prefer to know what happens to the money they provide. The easiest way to learn about the profit generated from invested capital is to use the ROIC – return on invested capital. If this metric is high, it indicates that the company management is successful in generating revenues for the company and that the invested capital is being used efficiently. A low ROIC, on the other hand, might be a warning sign that the shareholders' money is being spent without an increase in revenues.
2% is considered to be a threshold value. If the ROIC of a company lies over 2%, the company creates value for its shareholders. On the other hand, companies with less than 2% of ROIC are called value destroyers.
ROIC is one the most reliable indicators of investments' productivity, especially in the case of companies with a large amount of invested capital, such as mining companies or big manufacturing plants. However, you should be aware that it shows the overall return rather than the performance of individual assets. Based on ROIC alone, it's impossible to pick the investments that brought the most – or the least – profit.
If you're an entrepreneur, you might also be interested in another metric – the weighted average cost of capital – which tells you more about the costs of financing your company.
The return on invested capital formula has two basic elements:
NOPAT – net operating profit after tax. It can be calculated from EBIT (earnings before interest and taxes) with the following equation:
NOPAT = EBIT × (1 - tax rate)
Invested capital – a sum of all debt and equity on the balance sheet of a company.
To calculate ROIC, we need to divide NOPAT by the invested capital. You can write the return on invested capital formula in two forms:
ROIC = NOPAT / invested capital,
ROIC = [EBIT × (1 - tax rate)] / (debt + equity)
💡 For more on EBIT, take a look at the EBIT calculator.
How to calculate ROIC?
Let's consider an example of a company that recently raised $100k in capital. The stakeholders wish to know how well the company is doing, so the company decides to calculate the value of the ROIC indicator.
First of all, the company in question needs to determine its NOPAT. They can calculate it by multiplying EBIT by 1 minus the tax rate. Let's assume that EBIT equals $50k and that the tax rate is 25%. Then:
NOPAT = EBIT × (1 - tax rate)
NOPAT = $50k × (1 - 0.25)
NOPAT = $37.5k
Then, the company needs to sum up all the invested capital. Let's say they have no debts, and the capital from equity equals $121.5k.
Using the ROIC formula presented above, you can now calculate their return on invested capital:
ROIC = $37.5k / $121.5k = 30.86%
As you can see, the ROIC equals 30.86%. Such a value indicates that the company is in excellent financial condition, but that value can be challenging to reach and retain. To get a better overview of the enterprise's performance, you should compare this metric to typical values from the industry and ask for the measurements from the last few years to check whether the company is developing.
If you are looking for other investment options, we recommend checking our systematic investment plan calculator.
Other financial calculators
A company with a high return on invested capital (ROIC) related to its peers will likely be an excellent investment. However, if you manage to average down your stock cost basis, it has more probability of generating a great return. But how to know at which price you should buy?
For such an endeavor, you can use our amazing discounted cash flow calculator, which can help you determine if the company you are buying is currently underpriced or overvalued. Just remember, buying at a lower stock price reduces your risk.
Finally, stocks with a high return on invested capital (>15%) for a long period of time (for example, over five years) usually grow faster than the overall market, showing a higher beta than 1 – see the beta stock calculator. If your portfolio is concentrated on such stocks, the beta of your portfolio will be over 1, too – our portfolio beta calculator can help check the beta for your portfolio. This means you could earn more money than the average of the market but lose more as well.
What's the ROIC (return on invested capital) formula?
The return on invested capital formula is:
ROIC = NOPAT / invested capital
ROIC = EBIT × (1 - tax rate) / (debt + equity)
- ROIC – Return on invested capital;
- NOPAT – Net operating profit after tax; and
- EBIT – Earnings before interest and taxes.
However, you can use Omni's ROIC calculator to make it easier to work out ROIC.
Is ROI the same as ROIC?
No. While both return on investment (ROI) and return on invested capital (ROIC) might look alike, and both are presented in the form of percentages, they have different financial purposes.
While ROI shows the ratio between the net gain and the net cost invested and expresses how profitable an investment could be, ROIC shows a company's efficiency, considering its debt and equity.
How do I calculate the return on invested capital (ROIC)?
If you are wondering how to calculate the ROIC, you only need to divide the NOPAT (net operating profit after tax) by the invested capital. Also, you can use our calculator and introduce the following data:
- EBIT or earning before interest and taxes;
- Tax rate;
- Debt; and
What’s a good return on invested capital (ROIC) value?
Above 2%. If you are wondering if the company you invested in is doing well, the ROIC should be above 2%. For example, if you invested $1,000 into a company that has no debts, the EBIT (earnings before interest and taxes) is $100, and the tax rate is 10%; the ROIC for this scenario is 9%, which means that the company is generating value for its shareholders.