Return on Invested Capital CalculatorROIC is an online tool that helps analysts and investors determine whether and how much a company is profitable in investing capital. The higher the ROIC score you get, the more efficiently it performs in business. On the contrary, if a company earns a low score, it indicates that it is bad, and investors should avoid those companies.

Check out our finance-related calculators besides ROIC calculator, such as Markup Calculator, or Disposable Income Calculator. Also, there is a lot of interesting posts in our everyday life and math section, so feel free to visit these sites.

Invested Capital – What is?

Invested capital (ROIC)

By definition, invested capital is the combined capital of equity (see Return on Equity) and debt raised by a particular company. It is the capital raised by both those who hold stocks and those who hold bonds in the company. Invested capital is used for expansion purposes, purchasing new land or building, and paying the day-to-day expenses. Instead of taking out a loan from a bank, you can use the funds from invested capital.

Net Operating Profit After Tax (NOPAT) – Definition and Formula

In a nutshell, NOPAT, or net operating profit after tax, is the number that shows the company’s income from core operations if we suppose that it has zero debt and no interest expense. So, let me show you how we can easily calculate NOPAT.

NOPAT = EBIT \times (1-TR)

Where:

EBIT – Earnings before interest and taxes

TR – Tax rate

Net operating profit after tax indicates future free cash flows.

Return On Invested Capital – Definition?

Return on invested capital is a self-explanatory term used in finance. It indicates how effectively invested funds from investors are used in the company. Generally, when investors look for investing money in a company, they seek for companies capable of effectively using the invested capital. For instance, if the company uses the invested capital and profits from it, it causes the ROIC score to grow proportionally. Therefore, a high score indicates that a company efficiently uses the invested capital. In contrast, if the score is low, it wastes the money it borrowed from the investors. 

The normal average percentage is 2%, thus any company with a score less than 2% is called a value destroyer.

Investors look for companies with good ROIC, and based on its score, they decide which company has the best potential to generate income (Return on Investment).

Return On Invested Capital Formula

The formula for calculating the ROIC score relies on the NOPAT value. Therefore, in order to find the score of a particular company, we take the NOPAT value and divide it by the invested capital, as you can see below:

ROIC = \frac {NOPAT} {Invested \; Capital}

However, there is also another way we can write the formula for calculating return on invested capital:

ROIC = EBIT \times \frac {1-Tax\;Rate} {Debt + Equity}

ROIC vs WACC

We learned a little bit about ROIC and its importance in finance. First, we mentioned that the ROIC score could tell you how well a company uses its capital to generate profit or returns and helps us to understand and evaluate the growth. However, there is another finance term that is quite related to return on invested capital, called WACC or Weighted Average Cost of Capital.

WACC or Weighted Average Cost of Capital is used to measure the company’s total cost of capital, both debt, and equity. It indicates the minimum cash a company has to earn on its existing assets’ base to satisfy its investors, creditors, and owners.

WACC = \frac {E} {E+D} \times CE + \frac {D} {E+D} \times CD \times (1-TR)

Where:

E – Market Cap

D – Book value of debt

CE – Cost of Equity

CD – Cost of Debt

TR – Tax Rate

E / (E + D) – Weight of equity 

D / (E + D) – Weight of debt

ROI vs ROIC

ROI and ROIC are two very close finance terms, and even their meaning is very similar. However, there is a slight difference:

  • Return on investment tells you how much money (return on investment) a company has generated from a single investment, while
  • Return on invested capital indicates how efficiently a company uses the investors’ funds to generate income. It is not limited to only one investment, but it tracks its performance in business for a longer period.

ROIC Calculator – How to Use?

We have all the necessary formulas in front of us, and we grasped the concept of NOPAT and ROIC enough to be able to calculate their scores on our own. Of course, you can always calculate them manually using the formulas above. However, there is a faster and more efficient way. Instead, it is highly recommended to use our calculator that gives you the percentage rate in a few clicks.

Using our Calculator – steps:

  1. Calculate the NOPAT value of a company. Let’s assume the EBIT equals $40,000, and the tax rate is 20%. Enter those numbers in the calculator, and you will get the NOPAT value, which is $32000.
  2. Once we know the NOPAT value of the company, we can proceed to calculate the ROIC score. Determine the debt and equity of the company. Suppose there was no debt and equity was $100,000. As a result, the calculator gives us a score of 32%. The score of 32% is pretty high, indicating that the company efficiently uses the invested capital and generates a high return on investment.

ROIC Calculator – Example

In the section above, we showed how the calculator works in general. Now, it’s time to make up a scenario and show you how to use our calculator in the real example.

Scenario: You run a company, and you measure that your NOPAT is $30,000. In terms of invested capital, your company has a debt of $30,000 and equity of $50,000. The question is, what’s the Return on invested capital score?

Let’s enter the values in our calculator and see what the score we get:

NOPAT – $30,000

Invested capital = Debt ($30,000) + Equity ($50,000) = $80,000

Return on invested capital = 37.5%

ROIC – What does it tell you?

Return on invested capital helps analysts to grasp and have a better idea of how a company utilizes the operating capital. ROIC is always expressed in percentages (%), and it signalizes how well the company’s management performs in business.

FAQ

What is a good ROIC ratio?

In order to give a proper answer, analyzing ROIC separately without WACC is, in most cases, wrong. To be able to evaluate the performance of a company (how much return on investment they generate in business), the return on invested capital score should always be higher than the WACC of the company. If the WACC number is higher than the ROIC, it indicates that the company’s capital investment cost was higher than the actual return on investment the company generated.

Is ROI the same as ROIC?

No, these two financial terms are not the same. For example, ROI shows how well a company utilizes the capital from a single investment. On the other hand, ROIC signalizes how efficiently a company uses the funds from the investors in generating income for a long period.

What are the steps for analyzing ROIC?

The first step is to find the NOPAT value of a company by considering EBIT and tax rate. Then, the second step is to figure out the total invested capital (debt + equity). Finally, after using the respective formula, you can analyze and calculate the ROIC score of the company, expressed in percentage (%).

What industries have a high ROIC?

The technology sector has the highest ROIC score by far, while the energy sector is found to earn the lowest score. For example, Apple has a very high score of 34.64%, or similarly, Microsoft earned an even higher score of 36.66% at the end of 2021.

How does return on invested capital ROIC affect a company’s cash flow?

Return on invested capital affects a company’s cash flow because if we have a higher score, it will lower expenditures and have higher cash flows.