Term · Profitability & Growth
ROIC
In briefROIC shows how high the after-tax operating return on invested capital is, usually as NOPAT relative to the capital tied up in operations. If it exceeds the cost of capital, this can indicate value creation - for small caps especially after acquisitions and growth investments.
Definition
ROIC measures the after-tax operating return on invested capital. It typically compares NOPAT with the capital employed in the operating business.
How it is calculated
Formula. Typically: ROIC = NOPAT / average invested capital.
Why it matters for small caps
A ROIC above the cost of capital can indicate value creation. For small caps, the trend after acquisitions and growth investments is particularly relevant.
Common misreadings
- Non-standardised adjustments to NOPAT, goodwill, leasing and excess cash can substantially change the figure. The definition must be consistent over time.
In the process
Frequently asked
What is ROIC?
It is the after-tax return on invested capital. It shows how efficiently a company deploys its operating capital.
How do you read ROIC?
You compare it with the cost of capital: if it is above, value is created on paper. Above all, the trend over several years is meaningful.
What is a source of error in ROIC?
Inconsistent adjustments to NOPAT, goodwill, leasing and excess cash can substantially affect the figure. The definition must remain consistent over time.
Related terms
Sources
Primary
NYU Stern – Aswath Damodaran, Valuation Resources
https://pages.stern.nyu.edu/\~adamodar/
https://pages.stern.nyu.edu/\~adamodar/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.