Profitability
Return on Invested Capital (ROIC)
ROIC measures the return the business earns on all the capital invested in it, debt and equity together.
ROE can be juiced with debt. ROIC cannot, because the debt is in the denominator. It asks whether the operations earn more than the capital they use. A firm that earns an ROIC above its cost of capital creates value when it grows. A firm that earns less destroys value when it grows, even if revenue headlines look wonderful.
This is the ratio to pair with a DCF. If your model assumes the company can reinvest at a high ROIC for a decade, you should be able to see something like that return already, or a concrete reason it is about to appear. Persistent double-digit ROIC is rare and is usually the signature of a real competitive advantage.
Formula
ROIC = after-tax operating profit ÷ invested capital (equity + interest-bearing debt − surplus cash)
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. Apply the formula on this page to that live price. Where the quote is missing an input, the stock page's financials are the next place to read it.
Related
Return on Capital Employed (ROCE) · Return on Equity (ROE) · WACC
See it on a list: best stocks · screener
Questions
How is ROIC different from ROE?
ROIC includes debt in the capital base and uses operating profit after tax. ROE uses only equity and net income. ROIC is the better operating comparison.
What is invested capital exactly?
Definitions vary at the edges (leases, cash, goodwill). Compare a company's ROIC with its own history more confidently than with a different provider's number.