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Return on invested capital definition

Description

Return on invested capital (ROIC) is a ratio that shows how well company’s financial resources are used to produce profit. As a rule ROIC is expressed as a percentage. Data to calculate this ratio is collected from the income statement, balance sheet and profit distribution statement.

ROIC is important to company’s owners as it shows how effectively managers operate the company’s capital. It is recommended to compare a company's ROIC with its weighted average cost of capital (WACC). This move can be helpful while evaluating how well the invested capital is being used.

Norms and limitations

There are no general norms for this ratio.

It is recommended to compare this ratio with ratios of companies working within the same industry.

Formula

Net income (net profit, net earnings), usually called “the bottom line”, is a measure which is calculated by taking revenues (sales and other incomes) and adjusting them to the cost of sales, operating cost, depreciation and amortization, interest, taxes and other expenses.

Dividends are a share of earned company's income which is devoted to the shareholders once per financial year.

Total capital is a measure that includes long-term debt and company’s equity.