financial-metrics
ROIC is after-tax operating profit divided by the capital actually invested in operations. It is the core test of whether a business earns more than its cost of capital.
ROE mixes operations with leverage. ROI is undefined. ROIC asks: if we look at the operating assets on the left-hand side, what after-tax yield do they produce?
Damodaran’s measurement paper is the professional reference for the traps (leases, cash, R&D, goodwill).
NOPAT = EBIT × (1 − tax rate)
(use a normalised operating tax rate, not the year’s effective rate if it is distorted)
Invested capital = Operating invested capital
A practical book construction:
Invested capital = Book equity + interest-bearing debt − surplus cash − non-operating assets
or equivalently operating NWC + net PPE + other operating invested items, with a consistent goodwill policy (include it if you want acquisition ROIC; exclude it if you want organic ROIC — say which).
ROIC = NOPAT / Invested capital
Value creation requires ROIC > WACC (see WACC).
Illustration only. Hypothetical industrial tech manufacturer.
| Amount | |
|---|---|
| EBIT | €9.0m |
| Tax rate (illustrative) | 25% |
| NOPAT | €6.75m |
| Equity (book) | €22m |
| Interest-bearing debt | €18m |
| Surplus cash | €4m |
| Invested capital | €36m |
| ROIC | 18.8% |
| WACC (illustrative) | 9% |
| Spread | +8.8 pp |
If enterprise value implies a 15× NOPAT multiple, the market is capitalising that spread. If ROIC were 7% against a 9% WACC, growth would destroy value — the McKinsey/Koller identity in action.
High ROIC with no reinvestment is a cash cow. High ROIC with room to reinvest is the compounding machine. Low ROIC with high growth is a warning, not a “growth premium.”
Business valuation; testing whether an EBITDA multiple is consistent with economics; post-merger synergy claims (does the combined ROIC rise?).
Accounting invested capital can be far from replacement cost. One-off EBIT, tax-rate games, and aggressive capitalisation of opex distort both numerator and denominator. Comparability across IFRS vs local GAAP is imperfect.
Dazur computes a transparent ROIC bridge (NOPAT, capital employed, cash and goodwill policy) because a multiple without a return-on-capital story is just a price.