ROIC: drag invested capital
Drag invested capital. NOPAT stays still, so ROIC moves only because the denominator does. More capital is a lower rate with no change in profit after tax. That is the same trap as a lower P/E from a higher EPS, run on a stock of capital.
ROIC
15.0%
Invested capital
$500,000,000
NOPAT stays $75,000,000. More capital in the denominator is a lower ROIC with no change in profit. Illustrative arithmetic, not a hurdle or advice.
EBIT
$100,000,000 at 25 percent tax, held still.
In short
- Drag the bar right for more invested capital and a lower ROIC.
- Drag it left for a thinner capital stock and a higher rate on the same NOPAT.
- Watch NOPAT sit still: the year of profit has not moved.
- Focus the handle and use the arrow keys to step the capital.
NOPAT over the operating capital
How ROIC works is the ratio. How NOPAT works is the numerator. The ROIC calculator is the division. Return on invested capital is NOPAT over the capital tied up in the operations.
Compare the rate with WACC
How WACC works is the hurdle this rate is read against. ROE against ROIC is the residual against the operations.
A rate hides scale
Fifteen percent on a small stock of capital and 15 percent on a large one are different amounts of NOPAT. Put the dollars back in.
Common questions
Why did ROIC fall if profit did not?
Because the capital used to produce it rose. The numerator is held still on this picture on purpose.
Is a higher ROIC always better?
It is a higher rate on this teaching sheet. Compare it with WACC, and look at the size of the capital.
Is this a buy?
No. It is NOPAT over invested capital. It is educational material, not advice.
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.