Return on Invested Capital
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What is Return on Invested Capital?
NOPAT / IC = ROIC
- NOPAT is what the company earns from its core business operations after taxes. (Operating Income * (1 - Tax Rate))
- Invested Capital is the money raised from investors and lenders to put into its core operations.
For example, a car company raises $5 billion from shareholders, and loans $3 billion from banks, then uses that to build a factory. The $8 billion is the Invested Capital. If the company earns $2 billion from its core operations, then its ROIC is 25%.
Why is it useful?
Generally you want a ROIC higher than its cost of capital (WACC). The WACC for most companies is now 6-12%. So if ROIC is higher, then the company is creating value for shareholders. If its lower, then the company is destroying value.
When comparing companies in the same industry, the one with the higher ROIC is able to generate more profit from the same amount of capital. This is a sign of a more efficient company.
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The stock data is sourced from Financial Modeling Prep.
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