Return on invested capital measures how efficiently a company turns the capital tied up in its operations into after-tax operating profit. Analysts use ROIC to judge whether a business earns more than its cost of capital and creates economic value.
When ROIC exceeds WACC, the company generates economic value above its blended cost of capital. A positive EVA spread means each dollar of invested capital earns a return above what investors require.
Worked example
With EBIT of $1,000,000 and a 25% tax rate, NOPAT equals $750,000. Invested capital of $4,000,000 equity plus $2,000,000 debt minus $1,000,000 cash equals $5,000,000. ROIC is 15%. Against an 8% WACC, the EVA spread is 7% and EVA equals $350,000.
Frequently asked questions
What is a good ROIC?
Many value investors look for ROIC consistently above WACC and ideally above 10% to 12%, but benchmarks vary by industry. Capital-light software firms often show higher ROIC than heavy manufacturers.
Why subtract cash from invested capital?
Cash not required for operations is excluded because it does not contribute to earning operating returns. The equity plus debt minus cash approach approximates net operating assets financed by investors.
How is ROIC different from ROE?
ROE measures return on shareholder equity only. ROIC measures return on all capital deployed in operations, including debt-funded assets, and is less distorted by leverage.
What does a negative EVA mean?
Negative EVA means ROIC is below WACC. The company may be destroying economic value even if it reports accounting profits, because it is not covering its cost of capital.
Should I use average or ending balance sheet figures?
Period analysis typically uses average invested capital and average EBIT. Enter the figures you want to analyze; use fiscal-year averages when comparing annual performance.
Can I share my inputs?
Yes. Changing fields updates the page URL for easy sharing.
Resources and references
The formulas and methods in this calculator were checked against these independent sources.