ROIC - Return on Invested Capital
ROIC (Return on Invested Capital) is a metric indicating how much profit is generated relative to the capital (investment) put into a business. “Invested capital” may include funds raised from shareholders (equity) or borrowed from financial institutions (debt). As a measure of how effectively a company uses its capital and how much return it produces, ROIC is often used by shareholders, investors, and management to assess a company’s profitability and capital efficiency.
ROIC Formula
A common way to express ROIC is as follows (definitions can vary depending on the company or analytical purpose):
ROIC = NOPAT (Net Operating Profit After Tax) ÷ Invested Capital
NOPAT (Net Operating Profit After Tax):
Operating profit minus taxes.
Invested Capital:
The total amount of capital the company employs for its business activities.
For example, if a company’s NOPAT is 1 billion yen and its invested capital is 10 billion yen, its ROIC would be 10% (1 billion yen ÷ 10 billion yen).
Why ROIC Matters
Assessing Capital Efficiency
ROIC reveals how efficiently a company is using its overall capital—equity, debt, and other funding sources—to generate profits.
Even if the same amount of profit is produced, a company that achieves it with less invested capital will record a higher ROIC.
Indicator for Management and Investment Decisions
A high ROIC implies effective use of invested capital, helping managers prioritize investments and allocate resources efficiently.
Investors also view companies with high ROIC as having greater profitability and operational efficiency.
Key to Sustainable Growth
For a company to grow over the long term, it must generate returns that exceed the capital it invests (e.g., in M&A, new ventures, R&D).
Companies that consistently raise ROIC tend to enhance shareholder value and overall corporate value.
How to Improve ROIC
Increasing Profitability
Improve the profit margin of existing businesses (through cost reductions or pricing strategies).
Launch new, high-value-added products or services.
Optimizing Invested Capital
Dispose of unnecessary assets or facilities (through sale or write-off).
Improve inventory management and collection cycles to optimize working capital.
Evaluating Growth Investments
When considering M&A, new ventures, or R&D, examine whether the expected return will sufficiently exceed the invested capital, and prioritize accordingly.
Test the soundness of your investment plans and discontinue or revise projects with low potential.
Optimizing the Capital Structure
Maintain an optimal balance of equity and debt.
In some cases, excess capital can be used more efficiently by repurchasing shares, etc.
Conclusion
ROIC (Return on Invested Capital) measures how much profit a company generates relative to the capital it has invested—a crucial indicator of:
Capital efficiency and profitability
Long-term enhancement of corporate value
An essential benchmark for investors and management
Improving ROIC calls for raising profitability, refining working capital, and carefully evaluating investments, requiring a sustained company-wide effort. By focusing on these areas, a firm can strengthen its operational efficiency and bolster its value over time.