Return on invested capital (ROIC)
This is a ratio that can be used to assess how effectively a company squeezes profits from the assets it controls and owns.
This is a ratio that can be used to assess how effectively a company squeezes profits from the assets it controls and owns. The basic formula for the number takes trading profits and deducts tax before dividing by the total capital to give a percentage.
So if a firm's trading profits is £70m, taxes are £20m and total capital employed is £500m, then ROIC is (70-20)/500, or 0.1, which as a percentage is 10%. The higher this is the better, and it could be compared to, say, the return you can get from other less risky investments such as a bank account.
To see whether 10% is a good result you also need to compare ROIC to the cost of capital for the firm. If it costs a firm 15% in annual borrowing costs to generate 10% ROIC, then the firm isn't creating value for shareholders. Ideally, you want a decent positive gap between ROIC and a firm's cost of capital.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Revealed: the best funds to buy before the end of the tax year
Looking to add more investments to your portfolio but not sure where to start? We reveal the best funds to buy now as the end of the tax year edges closer.
By Katie Williams Published
-
4 tax tips for the Bank of Mum and Dad before the end of the tax year
Parents and grandparents wishing to gift money in a tax-efficient way need to be aware of the looming 5 April end-of-tax year deadline. Here are our tips to beat the deadline.
By Ruth Emery Published