What Is Return on Invested Capital?
Return on invested capital, or ROIC, shows how much profit a company makes for every dollar invested in the business, from both owners and lenders.
How ROIC works
Invested capital is the money put into the business through shares and debt. ROIC divides after-tax operating profit by that capital. If a company has $100 invested and earns $15 a year from it, ROIC is 15%.
Why it matters so much
A company that earns a high ROIC and can keep reinvesting at that rate grows its value fast. A company with ROIC below its cost of borrowing destroys value as it grows, even if sales rise.
What is a good ROIC?
Many investors look for ROIC above 10% to 15%, held for years. A high ROIC that stays high is a sign of an economic moat, because competition usually pushes returns down.
See it in real companies
Open a company to see what it sells and how it makes money.