ROIC Formula

ROIC, or Return on Invested Capital, is a financial metric used to evaluate the efficiency and profitability of a company’s investments in capital. It measures the return generated by the company’s investments relative to the capital invested in the business.

The formula to calculate ROIC is:

ROIC = [ NOPAT/Invested Capital ] x 100%

Where:

• NOPAT stands for Net Operating Profit After Tax, which represents the company’s operating profit after deducting taxes.
• Invested Capital refers to the total capital invested in the business, including both debt and equity. It is calculated as the sum of debt and equity minus any non-operating assets or liabilities.

Here’s a breakdown of each component:

1. Net Operating Profit After Tax (NOPAT): NOPAT represents the company’s operating profit after deducting taxes. It is calculated as:

NOPAT = Operating Income x (1 – Tax Rate)

Operating Income is the profit generated from the company’s core operations before deducting interest and taxes, and the Tax Rate is the effective tax rate paid by the company.

Some call it NPAT or net profit after tax. Others call it OPAT, operating profit after tax.  

2. Invested Capital: Invested Capital represents the total capital invested in the business, including both debt and equity. It is calculated as:

Invested Capital = Total Debt + Total Equity – Non-Operating Assets

Total Debt includes all interest-bearing liabilities of the company, such as loans, bonds, and other debt instruments.

Total Equity represents the shareholders’ equity in the company, including common stock, retained earnings, and other equity accounts.

Non-Operating Assets or Liabilities are excluded from Invested Capital as they do not directly contribute to the company’s operating activities.

• ROIC is expressed as a percentage and
• Indicates the return generated by the company’s investments relative to the total capital invested.
• A higher ROIC suggests that the company is generating more profit from its investments and is more efficient in utilizing its capital.
• ROIC is commonly used by investors, analysts, and financial professionals to assess a company’s financial performance and compare it to industry peers.