Glossary

Return on invested capital (ROIC)

How much profit a company earns on the money invested in it by shareholders and lenders.

ROIC divides operating profit after tax by invested capital: the equity and debt the business uses to run.

A company that earns more on its capital than that capital costs (its WACC) creates value as it grows. One that earns less destroys value as it grows, however fast its sales rise.

Compare ROIC with companies in the same industry. A software company and a steel maker need very different amounts of capital, so their returns are not directly comparable.

Try it: WACC calculator

  • WACC (weighted average cost of capital): The average return a company's lenders and shareholders expect, weighted by how much of each it uses.
  • Free cash flow: The cash a business produces from its operations after paying for the investment it needs to keep going.

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