Return on invested capital (ROIC)

Definition

Return on invested capital (ROIC) in plain English

Return on invested capital, or ROIC, asks whether a company is a good money-machine: for every dollar of money put to work — from BOTH owners and lenders — how much profit does it produce? The top number is operating profit after taxes (what the core business earns from operations, minus tax), and the bottom is the total capital invested to run it. Think of pooling money from your parents (a loan) and your own savings to start a business, then checking how much that combined pot earns. ROIC matters because a company only truly creates value when this return beats the cost of the money it raised.

Learn these first

• P/E ratio
• Pecking order theory

Related Principles of Finance terms

• After-tax cost of debt
• Business risk
• Capital structure
• Cost of preferred equity
• Debt-to-capital ratio
• Debt-to-equity ratio
• Degree of financial leverage (DFL)
• Degree of total leverage (DTL)
• Financial leverage
• Hamada equation