Return on invested capital
Also called ROIC.
Profit earned per dollar of all capital in the business, debt and equity together.
ROIC = NOPAT / invested capital
NOPAT = operating income x (1 - effective tax rate)
Invested capital has no single agreed definition. Two common ones:
financing view: total debt + equity - cash
operating view: total assets - current liabilities - cash
Materiality uses the operating view. See below for why.What it means
Return on invested capital is return on equity's more demanding sibling. It measures profit against everything funding the business rather than the shareholders' portion alone, which makes it immune to the leverage trick that inflates ROE.
Compared against the weighted average cost of capital, it answers the question that decides whether a company is worth owning: does putting another dollar into this business create more than a dollar of value?
Worked example
Operating income of $180m, an effective tax rate of 25%, total assets of $2,000m, current liabilities of $450m and cash of $200m.
- 1NOPAT is 180 x (1 - 0.25) = $135m.
- 2Invested capital is 2,000 - 450 - 200 = $1,350m.
- 3135 / 1,350 = 0.10.
A 10.0% return on invested capital, modestly above a typical cost of capital near 9%. The business creates value as it grows, but not by a wide margin.
Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.
How investors read it
- The comparison that matters is against WACC. Above it, growth creates value; below it, growth destroys value faster the more the company grows.
- Sustained ROIC well above cost of capital is the quantitative signature of a competitive moat.
- Watch it alongside how much capital is being reinvested. High returns on a shrinking capital base are worth less than moderate returns being reinvested heavily.
Where it misleads
- There is no standard definition of invested capital, so published figures are frequently not comparable.
- Acquisitive companies carry large goodwill balances which depress the ratio, arguably correctly, since the money was genuinely spent.
- Asset-light businesses can show absurd returns because most of what they own is not on the balance sheet.
How Materiality uses it
Computed as a profitability ratio in the Financials tab, using the operating definition of invested capital: total assets less current liabilities and cash. The financing definition would be preferable, but it needs total debt, and short-term borrowings are not separately tagged in the filings pipeline, so that version would silently omit them and overstate the return. NOPAT uses the company's own effective tax rate rather than a statutory one, and where pre-tax income is negative the rate is meaningless, so the metric drops out rather than inventing one. It does not feed the scorecard; return on equity carries that role in the Financial health category, read alongside the leverage metrics to catch the borrowing that would otherwise flatter it.
The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.
Work it out yourself
Related metrics
A metric on its own is a number without a business attached to it. Materialitycomputes these from a company's own SEC filings, several years of them at once, and explains what the pattern means rather than leaving you to hold fifteen definitions in your head.