Return on Invested Capital (ROIC)

If you have been introduced to finance you would have heard of return on invested capital (ROIC). This is a coined term for financial people who measure it for managerial purposes within a corporation. Before understanding why it is measured it's best to find out the variables as to how to calculate the formula. 

The Formula for ROIC

Simply put, the formula for ROIC is to take net operating profits and divide that by the invested capital. In essence, that means the ROIC calculation uses net income as the numerator and invested capital as the denominator.

The numerator is net operating profits after taxes which is any operating profits minus taxes. The denominator as well is based on the operating capital. That is a fancy way of saying any investments that generate revenue and do not collect interest.

Why Is It measured ?

Financial managers like to have a way to measure if a project is working for them. Generally speaking, if the return on invested capital is greater than the cost of the capital used to finance the project that means the project is working out for the company. In this way, projects are able to be assessed numerically.

 

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