return on invested capital
A profitability measure showing how efficiently a company generates returns from all its invested capital — both debt and equity.
Example
“A 15% ROIC above the company's 9% WACC meant the business was genuinely creating shareholder value.”
Memory Tip
ROIC = profit from all capital deployed. Compare to WACC — if ROIC > WACC, value is being created.
Why It Matters
Understanding return on invested capital helps you evaluate whether a company is using its money wisely and generating good profits from every dollar invested. This matters for investment decisions because it shows which companies deserve your money and which ones waste resources, directly affecting your potential investment returns.
Common Misconception
Many people confuse return on invested capital with profit margin, thinking that a company making high profits automatically has excellent capital efficiency. However, a company can be highly profitable but still waste invested capital if it ties up excess money in inventory, equipment, or other assets that do not generate returns.
In Practice
Imagine Company A invests 100 million dollars in total capital and generates 15 million dollars in annual profit, giving it a return on invested capital of 15 percent. Company B invests 200 million dollars and generates 18 million dollars in annual profit, yielding only a 9 percent return. Even though Company B makes more total profit, Company A is more efficient at converting invested capital into returns, making it the better capital manager.
Etymology
RETURN (profit generated) ON INVESTED CAPITAL (debt plus equity deployed). Profit RETURNED on all INVESTED CAPITAL.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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