Below WACC (~under 8%): value-destroying
Every dollar reinvested earns less than it costs. Growth here shrinks intrinsic value rather than building it.
Benchmark
What is a good ROIC?
A good return on invested capital is one that clearly exceeds the company's cost of capital: its WACC, typically 8-10%. Above 10% creates value, 15-20% is strong and often signals a durable competitive advantage, and sustained 20%+ is elite. The critical point: ROIC below the cost of capital destroys shareholder value even when the income statement shows a profit.
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Short answer
The test is simple: does ROIC beat the cost of capital, and by how much? A 15-20% ROIC against a ~9% WACC is a wide, value-creating spread: the fingerprint of a high-quality business. ROIC below WACC means growth is actively burning shareholder money.
What counts as a good ROIC, by range
10-15%: good
Comfortably beats the cost of capital. A healthy, competitive business that compounds book value over time.
15-20%: strong
Hard to sustain without pricing power or a structural edge. Often the signature of an economic moat.
Above 20% (sustained): elite
Rare wide-moat compounders. Usually richly valued: the market knows. Verify the capital base isn't distorted.
A worked example
A company earning 1.5 billion dollars of NOPAT (net operating profit after tax) on 8 billion dollars of invested capital has an ROIC of about 19 percent. Against a 9 percent cost of capital, that is a 10-percentage-point spread.
That spread is what compounds: a business reinvesting at 19 percent grows intrinsic value far faster than one stuck at 9 percent, even with identical revenue growth. One year of high ROIC can be luck, look for 5 to 10 consecutive years before calling it a moat.
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Related
- What is ROIC? - the full definition, the formula, and why it beats ROE as a quality gauge.
- What is an economic moat? - the durable advantages that let elite businesses sustain high ROIC for years.
- What is the Magic Formula? - Greenblatt's combination of high ROIC and a cheap earnings yield.
- Top Magic-Formula stocks today - the live ranking of high-ROIC, cheap-EV/EBIT stocks.
See ROIC on a real verdict
invest-like reports ROIC and its trend inside the quality pillar of every Buffett-Fit verdict, benchmarked against the cost of capital.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.