What it is
ROIC measures how efficiently a company turns its invested capital (debt + equity) into operating profit. A 25% ROIC means each dollar of capital throws off 25 cents of profit a year.Why it matters
Buffett: "The single most important number for evaluating a business." High, sustained ROIC is the best evidence of a wide moat — competitors would copy a 30% ROIC business if they could; the fact that they can't (or haven't) means something structural is protecting it.What "good" looks like
- Excellent: 20%+ sustained over 5+ years (Apple, Visa, Costco)
- Good: 12–20% (most quality businesses)
- Fair: 5–12%
- Poor: < 5% — capital is being destroyed in real terms after the cost of capital
Pitfalls
- Asset-light businesses (software, consumer brands) naturally show higher ROIC than capital-heavy ones (utilities, telecoms). Compare within sectors.
- One year of high ROIC is noise. Buffett looks for 5–10 years of consistency.
- Goodwill from acquisitions inflates "Invested Capital" — businesses that grew via M&A may show artificially low ROIC.