How to Calculate Return on Invested Capital
There are several different ways to calculate a company’s return on invested capital (ROIC).
Each method is a variation of this basic formula:
Return on Invested Capital = Profit / Invested Capital
You’re dividing some measure of profit by the company’s debt and equity capital.
The question is how to measure profit and how to measure invested capital.
Some people measure profit as net income, EBIT, NOPAT, or NOPLAT.
Some people measure invested capital as the average debt and stockholders' equity, while others subtract cash and cash equivalents from that amount.
If you're trying to calculate a company's return on invested capital, one of the more common ways is to divide the company's NOPAT (net operating profit after taxes, which is equivalent to EBIT times one minus the tax rate) by the average of the company's debt and stockholders' equity.
Return on Invested Capital = NOPAT / Average debt and stockholders' equity
The return on invested capital can then be compared to the company's weighted-average cost of capital. If the ROIC exceeds the WACC, the company is creating value. If ROIC is less than WACC, the company is destroying value.
0:00 Introduction
0:19 Example 1
0:47 How to measure profit
1:28 How to measure invested capital
2:13 McKinsey's ROIC formula
2:32 WSJ ROIC formula
2:56 Pepsi's ROIC formula
3:17 Target's ROIC formula
3:39 Recommended formula
4:00 Example 2
4:59 Comparing ROIC to WACC
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