1. Compute NOPAT
Take operating income (EBIT) and multiply by (1 - effective tax rate). This strips out financing, isolating operating returns.
How to calculate
How to calculate ROIC
To calculate ROIC (return on invested capital), divide NOPAT - net operating profit after tax - by invested capital. NOPAT is operating income (EBIT) times (1 minus the effective tax rate); invested capital is total debt plus shareholders' equity minus excess cash. The result is the after-tax return the business earns on the capital it actually employs.
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Short answer
ROIC = NOPAT / invested capital, where NOPAT = EBIT x (1 - tax rate) and invested capital = debt + equity - cash. Then compare it to WACC: ROIC only creates value when it beats the cost of capital.
Step by step
2. Compute invested capital
Total debt + shareholders' equity - cash and equivalents. (Equivalently: total assets - current liabilities - excess cash.)
3. Divide
ROIC = NOPAT / invested capital x 100. That's the after-tax return on the capital funding the business.
4. Compare to WACC
ROIC above the cost of capital creates value; below it destroys value. The spread is what actually compounds.
Worked example
A company has $1.0B of EBIT and a 25% tax rate, so NOPAT = 1,000 x (1 - 0.25) = $750M. Its invested capital is $2B debt + $3B equity - $0.5B cash = $4.5B.
ROIC = 750 / 4,500 x 100 = 16.7 percent. Against a 9 percent WACC, that's a 7.7-point spread - the business earns well above what its capital costs, so reinvested earnings compound intrinsic value. If ROIC were 7 percent, below the 9 percent WACC, growth would be destroying value despite a positive profit.
ROIC calculator
Enter operating profit, the tax rate, and the capital figures.
Result-
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Related
- What is ROIC? - the concept and why it beats ROE as a quality gauge.
- What is a good ROIC? - the benchmark ranges once you've calculated it.
- What is WACC? - the hurdle rate ROIC must clear to create value.
See ROIC vs the cost of capital
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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.