Advertisement

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.

Advertisement - Article continues below

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.

Advertisement
Advertisement

Recommended

Economic indicators
Glossary

Economic indicators

An economic indicator is any statistic that allows us to analyse how the economy is performing or is likely to perform in future.
31 Jul 2020
Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Barbell strategy
Glossary

Barbell strategy

A “barbell… investment strategy means weighting a portfolio towards the two extreme ends of an asset class with nothing in the middle.
8 Jul 2020

Most Popular

Gold hits the big $2,000 level – are Aim miners about to play catch up?
Gold

Gold hits the big $2,000 level – are Aim miners about to play catch up?

With the price of gold shooting through $2,000 an ounce, the yellow metal looks unstoppable. Things are so bullish, even Aim-listed junior gold miners…
5 Aug 2020
Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Too embarrassed to ask: what is “real return”?
Too embarrassed to ask

Too embarrassed to ask: what is “real return”?

MoneyWeek's latest "too embarrassed to ask” video explains what a real return is and why it's so important for investors.
5 Aug 2020