Return on Invested Capital


Return on Invested Capital

Many people use ROE or Return on Equity. Invested Capital considers the fact that Return on Equity increases as book value decreases. So a company can get rid of assets or increase its debt or liabilities even if it didn’t actually improve it’s performance at all.

Return on Invested Capital ROIC

 

ROIC (Return on Invested Capital) is much better metric because it includes debt-financed capital and truly measures the effectiveness of company’s employment of capital.

Comparing a company’s return on capital (ROIC) with it’s Weighted Average Cost of Capital reveals whether capital was used effectively and efficiently.

Total Capital includes long-term debt, common and preferred shares.

Net Operating Income should have often be substituted for Net Income because of income potentially received from other sources.

Good uses of invested capital include projects, machinery, other companies.