Return on invested capital (ROIC) is closely related to ROCE. Like ROCE it looks at returns (usually EBITA) free of the effects of capital structure. There are a number of definitions of ROIC in use which incorporate various refinements:

  • Stripping out assets not used in the business (such as cash and financial investments)
  • Stripping out free funding (most often trade creditors)
  • Adding back the cost of assets that have been written off (most often goodwill impairment)
  • Adjusting for the effect of financial structure on tax paid.

The point of all these is the same: to give investors a better idea of the return the company makes on the money it has invested in the past. ROCE is flattered by writing off assets, ROIC is not. There are a number of definitions of ROIC. A good starting point is:

ROIC = EBITA ÷ ( A - C - X + W)

where A is total assets (equivalent to debt plus equity),
C is cash holdings,
X is non-interest bearing current liabilities, and
W is the cost of assets that have been written off.

It can sometimes be useful to refine this further by replacing EBITA with EBITA ×(1 - tax rate). This shows what the total return would be if the company was purely equity funded. This variant is preferable if comparing companies with permanently different tax rates (e.g., operations in different countries). Total assets includes all fixed assets and current assets.

NOPAT can be used instead of EBITA.

Although some references suggest excluding goodwill from ROIC, there is a very strong case of including it. It is an investment that has been made and that requires a return. The cash balance is excluded as it is not invested in the business, the same reason cash is not included when calculating EV.

Non-interest bearing current liabilities are excluded as they are free sources of funds for the company. If a company is funding a part of its assets by borrowing at no cost (often from trade creditors). By obtaining free funding a company is boosting returns to shareholders and this should be reflected in the ROIC.

The most difficult adjustment is the addition of assets that have been written off. How far into the past should once go? Should we add back an appropriately amortised value rather than the full value? Should amortisation of long lived intangibles in reversed?

ROIC is used to compare the efficiency of companies within a sector. Cross sector comparisons will not be meaningful: an aircraft manufacturer needs more assets than a software company. However, whatever industry the company is in, ROIC must be more than the WACC — otherwise the company is destroying rather than creating wealth.

ROIC is not perfect. As described above, it is still subject to the vagaries of asset values shown on the balance sheet. These depend on depreciation policies and the age of a company's assets. ROIC does nonetheless give investors a useful way of assessing how well run a company has been.

CROIC is similar to ROIC but measures cash returns.