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Glossary
Returns & risk

ROIC

Return on invested capital

The return on all the money in the business, borrowed and owned alike.

ROIC fixes ROE's blind spot by counting debt as capital too. It asks the fundamental question of business: for every pound put to work, how much comes back?

The decisive comparison is ROIC against the cost of that capital. A company earning 15% on capital that costs it 8% is creating value with every pound it invests. A company earning 5% on capital that costs 8% is destroying value by growing, which is the most insidious way to lose money slowly.

The formula
ROIC = Operating profit after tax ÷ (Debt + Equity)
Figure

The only five moats there are

1
Brand
People pay more for the same thing
2
Switching costs
Leaving is painful or expensive
3
Network effects
It gets better as it gets bigger
4
Cost advantage
It can undercut and still profit
5
Scale in a small market
Not worth invading

If you cannot name which of these a company has, it probably does not have one. It is merely doing well, which is a different and far more temporary condition.

Why it matters

It is arguably the single best number for identifying a genuinely superior business.

The mistake everyone makes

Cheering revenue growth at a company whose ROIC is below its cost of capital. That company is getting worse, faster.

Related terms

ROE
How much profit the company generates on the money shareholders have in it.
Economic moat
Whatever stops competitors from competing away a company's profits.
WACC
The blended rate a company must beat to be worth anything.

See ROIC on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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