Skip to content

How return on invested capital works

ROIC is NOPAT divided by invested capital. NOPAT is EBIT after tax. On $100,000,000 of EBIT, 25 percent tax and $500,000,000 of invested capital, NOPAT is $75,000,000 and ROIC is 15 percent. Compare that rate with WACC, not with the cost of equity.

Return on invested capital

15.00%

NOPAT is $75,000,000 on $500,000,000 of invested capital.

EBIT
$100,000,000
NOPAT
$75,000,000
Invested capital
$500,000,000
ROIC
15.00%
$

Figures on this page are in millions of dollars.

%
$

Operating capital the firm has tied up: equity plus interest-bearing debt, minus surplus cash, on a teaching sheet.

On this page

Next on Models and deals

NOPAT

In short

  • NOPAT is $100,000,000 of EBIT times (1 - 0.25), so $75,000,000. Against $500,000,000 of invested capital, ROIC is 15 percent.
  • Keep NOPAT at $75,000,000 and raise invested capital to $750,000,000. ROIC falls to 10 percent. Profit after tax did not fall. The capital tied up in the operations did.
  • The same 15 percent on a smaller firm: $80,000,000 of EBIT at 25 percent is $60,000,000 of NOPAT on $400,000,000 of capital. The rate matched. The scale did not.
  • ROIC is a return on the operating capital. ROE is a return on the residual claim. A recapitalisation can lift ROE without moving ROIC.
  • Compare ROIC with WACC, the cost of the whole capital. Comparing ROE with WACC mixes a residual return with a blended cost.

A return on the capital that produced the EBIT

Return on invested capital is NOPAT over the operating capital tied up in the firm:

ROIC=EBIT(1−t)ICROIC = \frac{EBIT(1-t)}{IC}

On $100,000,000 of EBIT at 25 percent tax, NOPAT is $75,000,000. Against $500,000,000 of invested capital, ROIC is 15 percent. On a teaching sheet, invested capital is equity plus interest-bearing debt minus surplus cash, the same stock enterprise value is pricing from the other side.

The ROIC calculator on this page is that one division. How ROE works divides net income by book equity instead. ROE against ROIC is the pair on one table.

NOPAT is before interest. Invested capital includes the debt. That is why a recapitalisation that only swaps claims should leave ROIC still, and why ROE can move when it does.

The denominator is the whole story

Keep EBIT at $100,000,000 and tax at 25 percent, so NOPAT is still $75,000,000. Raise invested capital to $750,000,000. ROIC is 10 percent.

The operations produced the same NOPAT. They used more capital to do it. A year of heavy capex can print this before the new assets earn. Surplus cash left in invested capital understates ROIC the other way, because the denominator is too large for the EBIT it is being asked to explain.

The same 15 percent on a smaller sheet

$80,000,000 of EBIT at 25 percent is $60,000,000 of NOPAT. Against $400,000,000 of invested capital, ROIC is 15 percent again.

The rate matched the first sheet. The firm is smaller. ROIC hides scale the way P/E does. A 15 percent return on $500,000,000 of capital and a 15 percent return on $400,000,000 of capital are different amounts of NOPAT, $75,000,000 against $60,000,000.

What this page is not doing

It is not ROE, not a cash-flow return, and not a WACC calculation. Compare 15 percent ROIC with WACC, and 15 percent ROE with the cost of equity. The three sheets are $75,000,000 of NOPAT on $500,000,000 (15 percent), the same NOPAT on $750,000,000 (10 percent), and $60,000,000 of NOPAT on $400,000,000 (15 percent). This is educational material, not financial advice.

Worked examples

100 million of EBIT on 500 million of capital

EBIT is $100,000,000, the tax rate is 25 percent, and invested capital is $500,000,000. What is ROIC?

  1. NOPAT: 100000000×(1−0.25)=75000000100000000 \times (1 - 0.25) = 75000000, so $75,000,000.
  2. ROIC: 75000000/500000000=0.1575000000 / 500000000 = 0.15, which is 15 percent.

NOPAT is $75,000,000. ROIC is 15 percent.

The same NOPAT on more capital

Keep EBIT at $100,000,000 and tax at 25 percent, so NOPAT is still $75,000,000. Invested capital is now $750,000,000. What is ROIC?

  1. NOPAT is unchanged: $75,000,000.
  2. ROIC: 75000000/750000000=0.1075000000 / 750000000 = 0.10, which is 10 percent.

ROIC is 10 percent. Profit did not fall. The capital in the denominator rose.

The same 15 percent on a smaller firm

EBIT is $80,000,000, tax is 25 percent, invested capital is $400,000,000. What is ROIC?

  1. NOPAT: 80000000×0.75=6000000080000000 \times 0.75 = 60000000, so $60,000,000.
  2. ROIC: 60000000/400000000=0.1560000000 / 400000000 = 0.15, which is 15 percent.

NOPAT is $60,000,000. ROIC is 15 percent, the same rate as the first sheet on a smaller stock of capital.

Common questions

Can ROE and ROIC print 15 percent and still disagree?

Yes. Fifteen percent on equity and 15 percent on invested capital are returns on different stocks, from different profit lines. On this sheet, 15 percent is $75,000,000 of NOPAT on $500,000,000 of invested capital. Match the rate to the capital it was earned on before treating them as one reading.

Which one belongs in a WACC test?

ROIC. WACC is the cost of the whole capital. Comparing ROE with WACC mixes a residual return with a blended cost. The ROE against ROIC page is the at-a-glance version of the split.

What is invested capital?

On a teaching sheet, the operating capital: equity plus interest-bearing debt minus surplus cash. It is the stock that produced the EBIT. Type the definition your course is using. This page divides NOPAT by whatever you put in that box.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.