A calculation used to assess a company's potential to be a quality investment by determining how well (i.e.. profitably) a company's management is able to allocate capital into its operations. Comparing a company's ROIC with its cost of capital (WACC) reveals whether invested capital was used effectively.
The general equation for ROIC is as follows:
Investopedia Says:
Total capital includes long term debt, common and preferred shares. Since some companies receive income from other sources or have other conflicting items in their net income, net operating profit after tax (NOPAT) will be used instead.
This is always calculated as a percentage. Invested capital can be in buildings, projects, machinery, other companies etc. One downside of ROIC is it tells nothing about where the return is being generated. For example, it does not specify if it is from continuing operations or from a one-time event, such as a gain from foreign currency transactions.
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Return on invested capital is a great way to measure the true value produced by a company. Spot Quality With ROIC
If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios. Ratio Analysis Tutorial
