Return on invested capital
What is return on invested capital?
Return on invested capital measures how much operating profit a business generates relative to the capital — debt and equity combined — used to produce it. It is a measure of how efficiently a company turns capital into profit.
ROIC = Net operating profit after tax ÷ Invested capital
- Written by
- Suggested Investments Research Team
- Content type
- Reference definition
- Published
- 2026-09-13
- Last reviewed
- 2026-09-13
What counts as invested capital
Invested capital typically includes debt and shareholders' equity, sometimes adjusted for cash. Different data providers calculate the adjustments differently, so ROIC figures from separate sources are not always directly comparable.
A number that means little without context
ROIC is most informative compared with a company's own cost of capital and its own history. A business earning a high return on a shrinking base is a different story from one earning a similar return while reinvesting profitably into growth.
Capital intensity distorts comparisons
A software business with little physical capital can post a very different ROIC profile from a manufacturer with heavy plant and equipment, even if both run their operations equally well.
A worked example
A company earning $2bn in after-tax operating profit on $10bn of invested capital has a 20% ROIC. Whether that is attractive depends on its own multi-year trend and the capital intensity of its industry, not on the number in isolation.
The mistake people make
Reading a single year's ROIC as proof of a durable advantage without checking whether it has persisted, and without adjusting for the business's capital intensity.
How we use it
Capital efficiency trends, including measures like ROIC, feed Fundamental Momentum by tracking whether profitability on invested capital is improving or deteriorating over multiple periods.
Related terms
Sources and methodology
- EDGAR full-text and structured filing data — U.S. Securities and Exchange CommissionPrimary source
- Intelligent Accumulation methodology — Suggested InvestmentsPrimary source
Keep reading
- Investing Glossary
Every investing term we use, defined once and in plain English — from compounding and drawdown to Form 13F and share dilution.
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- Free cash flow
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- Expense ratio
An expense ratio is the annual percentage of your money a fund keeps to run itself. It is deducted from returns quietly, every year, whether the fund performs
- Maximum drawdown
Maximum drawdown is the largest peak-to-trough fall an investment has suffered over a period. It measures the worst stretch an investor would have had to sit
Educational information only. Nothing here is a recommendation to buy or sell any investment, and no research measurement removes the risk of loss.