Formula
ROIC = after-tax operating income ÷ invested capital × 100 (%)
Invested capital is equity plus interest-bearing debt. With after-tax operating income of KRW 80 billion and invested capital of KRW 1 trillion, ROIC is 8%.
Definition
ROIC (return on invested capital) is after-tax operating income divided by invested capital, showing as a percentage how much profit the money actually put into the business generated. Invested capital combines shareholder capital and interest-bearing debt, narrowing the base down to the capital used in the core business.
If ROE looks only at shareholders' equity and ROA at all assets, ROIC selects only the capital put into the core business and looks at how efficiently it is used. It is therefore used to measure how well the business itself puts capital to work, without being swayed by surplus cash or assets unrelated to the core business.
Jupick does not put ROIC directly into the grade, but treats it as a deeper yardstick for interpreting ROE and ROA. Setting ROIC against the company's cost of capital gives a sense of whether the business earns more than that cost.
How to read it
A higher ROIC means the capital put into the core business is used efficiently. In particular, when ROIC exceeds the company's cost of capital, it is read as a sign that the business earns more than what the borrowed money costs.
Unlike ROE and ROA, ROIC leaves out surplus cash and assets unrelated to the core business, so it shows the efficiency of the business itself more clearly. Setting the three metrics side by side separates whether profit comes from the core business or from elsewhere.
The definitions of invested capital and after-tax operating income used in the calculation differ slightly between data sources, so the value can vary by source. A multi-year trend calculated on the same basis is safer than the absolute value.
Points to watch
- Definitions of invested capital and after-tax operating income differ between data sources, so the value can vary by source.
- Capital structures differ widely by sector, so ROIC is hard to compare across sectors as is.
- Its meaning comes through when the trend over several years and its relationship with the cost of capital are read together, rather than a single year's value.