Many long-term investors eventually bump into a bigger question — how do you know if a company is really using its money well? You might already check revenue or earnings, maybe even dividends . But they don’t share all the insights about a company. The return on invested capital (ROIC) ratio can help provide another perspective.
Whether you’re investing through exchange-traded funds (ETFs) or individual shares , ROIC can be a helpful measure. It doesn’t just ask, “Is this company profitable?” It asks, “Is this company making smart decisions with its capital?”
In this article, we’ll walk through ROIC. We cover what it means, how it’s calculated, and how it might help you feel more confident when assessing a company’s long-term potential. No finance degree required.
What is return on invested capital?
Return on invested capital shows how efficiently a company uses the money it has to make a profit. It tells you how well a company turns its financial resources into returns. Those resources, often called invested capital , include both borrowed money (debt) and funds from shareholders (equity).
If a company raises money through loans or from investors, what does it do with that money? ROIC can help answer that. Rather than just looking at revenue or profit alone, ROIC shows how effectively that profit is earned from the capital invested. It focuses on the company’s operations, not side investments or short-term wins.
Many long-term investors look at ROIC to understand the quality of a business, not just its size. That’s because it can highlight whether a company is growing sustainably. For instance, two companies might have similar earnings, but one might be using twice as much capital to get there. That difference matters.
A higher ROIC means the company is getting more return from the capital it uses. It might point to strong decision-making or a competitive edge.
ROIC is a piece of the puzzle that can help you spot the difference between a company that’s growing quickly and one that’s growing wisely .
How is ROIC calculated?
The basic formula for ROIC looks like this:
ROIC = Net operating profit after tax (NOPAT) ÷ Invested capital
Let’s break that down into simpler parts.
Net operating profit after tax (NOPAT) is a company’s profit from its main business activities, after subtracting tax. It doesn’t include one-off gains or losses. It also leaves out interest payments, since we’re focusing on how the business performs, not how it’s funded.
Invested capital includes the money a company uses to run and grow its business. This usually means long-term debt and shareholder equity . From that total, we remove any non-operating assets like excess cash or unused buildings — things not directly tied to the core business.
Here’s a simplified example for a company:
- NOPAT: $2 million
- Long-term debt: $4 million
- Equity: $6 million
- Non-operating assets: $1 million
Invested capital = $4m + $6m – $1m = $9 million
ROIC = $2m ÷ $9m = 0.222 or 22.2%
This tells us that for every dollar the company invests in the business, it earns just over 22 cents in profit from operations.
In the real world, ROIC calculations can vary. Some analysts adjust the numbers based on how companies report their earnings or value their assets. Different sources might also define NOPAT and invested capital slightly differently.
So if you’re comparing ROIC across companies or sectors, check how the numbers were calculated. The concept stays the same, but the details might shift.
Why should I care about ROIC as a long-term investor?
As we’ve said, ROIC shows how efficiently a company uses its capital. But why should that matter to you? Because it can hint at how well a company is managed.
Strong ROIC may suggest the business is making smart decisions with its money. That includes choosing where to invest, expand, or hold back.
Companies with consistently high ROIC often reinvest in ways that grow the business over time. This reinvestment, if done well, can create lasting value for shareholders. It’s not just about high profits — it’s about how those profits are earned and used.
ROIC is also helpful when comparing companies in the same sector. One might use its capital more effectively, even if its revenue looks similar.
Some investors use ROIC alongside other tools like return on equity or earnings growth. This gives a broader view of business quality and performance.
How can I use ROIC in my investing strategy?
ROIC can give context to company performance and help you feel more confident in your research. But you don’t need to calculate ROIC yourself, unless you’re keen to. Many platforms and analysts do the maths for you.
Here are a few simple ways to use it:
- Compare companies in the same sector : A higher ROIC might suggest one business is using its capital more effectively than another.
- Look for consistency over time : One strong year isn’t enough. A steady or rising ROIC may point to thoughtful decision-making.
- Watch for reinvestment patterns : If a company earns strong returns and reinvests well, it may support longer-term growth. This isn't always the case, but it’s worth noting.
ETFs and fund managers often use ROIC when selecting companies for their portfolios. So if you invest through a fund, this work might already be happening behind the scenes.
What’s considered a “good” ROIC?
There’s no universal number, but many investors see ROIC above 10–15% as strong. However, it depends on the industry.
For example, tech companies often have higher ROICs because they don’t need much capital to grow. Utilities are capital-heavy and tend to report lower figures.
A “good” ROIC usually means the company earns more from its investments than it pays to fund them. That funding cost is called the weighted average cost of capital (WACC) . If ROIC is higher than WACC, the business is likely creating value.
But numbers alone aren’t enough. A high ROIC isn’t always positive if the company isn’t putting those returns to good use. If it earns great returns but doesn’t reinvest (or reinvests poorly), that performance may not last.
Consistency matters. One good year doesn’t reveal much. A strong, steady ROIC over time may offer more insight into how well the business is run.
Can I find ROIC for ETFs, or is this just for individual companies?
ROIC is mostly used to assess specific companies . That said, some ETF providers share the average ROIC across their portfolio holdings. This is more common in actively managed ETFs or quality-focused ETFs.
You might see it listed in the fund’s fact sheet or on their website. Not all funds publish it, though. Financial platforms may also show average ROIC for ETFs. Just note that it’s a blended figure, not specific to one company. That means it’s less precise. A high average ROIC might be driven by a few standout businesses.
Without more context, it’s hard to know how evenly those returns are spread across the fund. So while you can find ROIC figures for some ETFs, they work best as a general guide and not a detailed measure.
Are there any pitfalls or limitations to using ROIC?
ROIC can be a helpful tool, but it’s not without its flaws. Here are a few things to keep in mind:
- It can be tweaked with accounting tactics . Some companies may adjust how they report numbers. For example, they might shift expenses into assets to boost reported profits. This can make ROIC appear stronger than it actually is.
- It doesn’t capture short-term risks . ROIC reflects operational efficiency, not external shocks. Things like sudden regulation changes, market downturns and supply chain disruptions won’t always show up in the ROIC figure.
- It varies across sectors . A “strong” ROIC looks different in different industries. Capital-heavy sectors like energy or infrastructure tend to report lower ROIC than tech or software companies.
- It works best when used with other tools . ROIC isn’t meant to stand alone, but you can use it to support your research, not replace it.
When used thoughtfully, ROIC can help you ask sharper questions. Just make sure you’re looking at the full picture, not just one number.
How does ROIC compare to other profitability ratios?
ROIC isn’t the only way to measure a company’s profitability. Two other common ratios are return on equity (ROE) and return on assets (ROA). Here’s how they differ:
Return on equity
- Measures how well a company uses shareholders’ equity to generate profit
- Ignores debt, so it only looks at part of the funding picture
- Can look strong even when the company relies heavily on borrowed money
Return on assets
- Looks at how much profit is earned from the company’s total assets
- Doesn’t consider whether those assets were funded through debt or equity
- May favour asset-light businesses
Return on invested capital
- ROIC looks at all capital, both debt and equity
- Gives a broader view of how efficiently a company uses its financial resources
- Helps highlight how well management allocates capital overall
Each ratio offers a different lens. ROE might be useful if you care most about returns to shareholders. ROA can help compare asset-heavy businesses. ROIC brings it all together.
Which one you focus on depends on what you’re trying to understand. And which part of the company’s performance matters most to you.
Numbers tell stories — ROIC helps you read them
ROIC isn’t just a finance acronym; it helps shine a light on how efficiently a company turns capital into profit. And when you’re building wealth for the long term, that matters.
You don’t need to become an expert in calculating ROIC. But understanding what it tells you? That’s powerful. Because when you invest, you’re not just buying a share, you’re buying into a story. ROIC can help you figure out whether that story is being written with care.
Keep asking questions. Keep learning. That’s how strong investing habits are built, one insight at a time.
All figures and data in this article were accurate at the time it was published. That said, financial markets, economic conditions and government policies can change quickly, so it's a good idea to double-check the latest info before making any decisions.