ROIC measures how efficiently a company generates returns on all capital invested in the business, both debt and equity.
Return on Invested Capital is considered by many investors to be the most important profitability metric. It measures how well a company generates cash flow relative to the capital invested in the business. ROIC uses NOPAT (Net Operating Profit After Tax) to exclude the effects of capital structure, making it ideal for comparing operational efficiency across companies. Warren Buffett and Charlie Munger frequently cite ROIC as a key indicator of business quality.
NOPAT = Operating Income × (1 - Tax Rate). Invested Capital = Total Equity + Total Debt - Cash. If NOPAT is $3B and invested capital is $20B, ROIC = (3 / 20) × 100% = 15%.
ROIC above 15% is excellent, indicating strong competitive advantages and efficient capital allocation. Companies with durable moats often sustain high ROIC.
ROIC below the cost of capital (typically 8-10%) suggests the company is destroying shareholder value with its investments.
Look for companies with ROIC consistently above 12-15%. The best businesses maintain ROIC above 20% for extended periods.
