Returns & Safety
What is return on invested capital (ROIC)?
Return on invested capital: the after-tax profit the business earns on all the money invested in it, from lenders and shareholders alike.
How it is calculated
Operating income after tax divided by invested capital, where invested capital is total debt plus total equity (including the equity outside investors hold in subsidiaries) minus cash, cash equivalents and short-term investments.
How to read it
A core test of a good business. Above 15% for many years usually means a durable advantage; below the cost of capital, roughly 7 to 10% for most companies, growth destroys value.
Keep in mind
ROIC is defined differently by almost every provider, so expect the figure to differ elsewhere.
Where the numbers come from
Scrutar computes return on invested capital (ROIC) from the figures each company reports to the SEC in its annual and quarterly filings, using the XBRL data attached to those filings.