What is it?
Return on Invested Capital is Net Operating Profit After Taxes (NOPAT; Operating Profit x (1 – tax rate)) divided by invested capital. The most common way to calculate invested capital is to add the book value of a company’s equity to the book value of its debt, then subtract non-operating assets, including cash and cash equivalents, marketable securities, and assets of discontinued operations.
Who is interested?
The financial community and investors.
What does it tell me?
Return on invested capital is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments.
The return on invested capital ratio gives a sense of how well a company is using its money to generate returns. Comparing a company’s return on invested capital to its weighted average cost of capital (WACC) reveals whether invested capital is being used effectively and creating economic value.