ROIC = Profit/Invested Capital
Invested Capital = Working Capital + Fixed Assets - Cash.
ROIC abbreviates 'Return on Invested Capital'.
The key figure shows the company's return on the investments made in the company. Investors want to know that the company can convert the invested capital into a good return.
ROIC is used to see how efficiently the invested capital is used.
ROIC is well-suited for industries that make large investments. If a company has a higher ROIC than its competitors, the company is better at getting a return on its investments and can have a competitive advantage, or a so-called moat.
Compare companies within the same industry to get a sense of what constitutes a good ROIC.
Things to keep in mind
- ROIC should be as high as possible. This shows that the company can use its invested capital to create profitability.
- If the ROIC is 23, the profit is 23% on invested capital.
- Non-recurring items may result in a misleading ROIC.