Work out how much after-tax operating profit a company earns on the capital invested in it. Enter EBIT and a tax rate (or NOPAT directly) plus debt, equity and cash, then add WACC to see whether the business is creating or destroying value.
Last updated:
Operating profit
$
%
Effective or statutory rate (US federal 21% + state).
$
Net operating profit after tax.
Invested capital
$
Short- and long-term borrowings (add lease liabilities if you include them).
$
Book value.
$
Excess cash not needed to run the business.
$
Optional. Gives ROIC on average capital.
Compare with the cost of capital
%
Optional. Weighted average cost of capital.
Enter your values to see the result.
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How to use the ROIC Calculator
Choose how to enter profit: EBIT and a tax rate, or NOPAT if you already have it.
Enter invested capital: total debt, shareholders' equity and the cash to subtract.
Optionally add last year's invested capital to measure ROIC on average capital.
Enter WACC to compare returns with the cost of capital.
Press Calculate ROIC to see ROIC, the spread, economic profit and the step-by-step math.
How ROIC is calculated
ROIC = NOPAT ÷ Invested capital
NOPAT = EBIT × (1 − Tax rate) · Invested capital = Total debt + Shareholders' equity − Cash
Economic profit = (ROIC − WACC) × Invested capital
Example with the default inputs: EBIT of $500,000 taxed at 25% gives NOPAT of $375,000. Debt of $1,200,000 plus equity of $1,800,000 minus cash of $300,000 gives invested capital of $2,700,000, so ROIC = 13.89%. With a 9% WACC the spread is 4.89 points and economic profit is about $132,000 a year.
ROIC, WACC and value
Situation
What it means
Effect of growth
ROIC well above WACC
The business earns more than investors require
Investing more capital at similar returns adds value
ROIC about equal to WACC
Returns just cover the cost of capital
Growth adds revenue but little value
ROIC below WACC
Capital would earn more elsewhere at the same risk
Growth destroys value until returns improve
Tips and common adjustments
Operating vs financing approach: invested capital can also be built from the asset side (net working capital + net fixed assets + goodwill). Both should give similar totals if the balance sheet is consistent.
Leases: if you add lease liabilities to debt, add back the interest part of lease costs to EBIT so profit and capital match.
Goodwill: including it measures returns on everything paid for acquisitions; excluding it shows the returns of the underlying operations.
One-off items: remove restructuring charges and asset-sale gains from EBIT for a cleaner view of ongoing returns.
Look at several years: one strong year is not a moat; consistent ROIC above WACC is what investors look for.
Frequently asked questions
What is the ROIC formula?
ROIC = NOPAT ÷ invested capital. NOPAT (net operating profit after tax) = EBIT × (1 − tax rate). Using the financing approach, invested capital = total debt + shareholders' equity − cash. For example, NOPAT of $375,000 on invested capital of $2,700,000 is a ROIC of 13.9%.
What is a good ROIC?
A ROIC is good when it is higher than the company's weighted average cost of capital (WACC), because then each dollar invested earns more than investors require. Many analysts look for a spread of a few percentage points sustained over several years as a sign of a durable competitive advantage.
Why is cash subtracted from invested capital?
Excess cash is not used in operations and earns only interest, which is excluded from NOPAT. Subtracting it keeps the numerator and denominator consistent, so ROIC measures the return on the capital actually working in the business.
What is the difference between ROIC, ROE and ROA?
ROE divides net income by shareholders' equity and is boosted by leverage. ROA divides net income by total assets. ROIC uses operating profit after tax, before interest, divided by both debt and equity capital, so it shows how well the business itself performs regardless of how it is financed.
What is economic profit or EVA?
Economic profit = (ROIC − WACC) × invested capital, which equals NOPAT minus a capital charge of WACC × invested capital. Positive economic profit means the business earned more than its investors' required return in that year.
Which tax rate should I use for NOPAT?
Use the company's effective tax rate on operating profit, or the statutory rate when the effective rate is distorted by one-off items. In the US the federal corporate rate is 21%, and adding state taxes typically brings the combined rate to roughly 24% to 27%.
Should I use beginning, ending or average invested capital?
Average capital, (beginning + ending) ÷ 2, best matches a year of profit with the capital in use during that year. Some investors use beginning capital to measure the return on what was already invested. Pick one method and use it consistently.
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