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Return on invested capital

After-tax operating profit divided by invested capital; the return the business earns on all the money employed in it, before financing choices.

ROIC is the measure most closely tied to value creation, because it is directly comparable with wacc. A company earning ROIC above its cost of capital creates value by growing; one earning below it destroys value faster the more it grows.

Unlike return-on-equity, ROIC cannot be manufactured with debt, which is why it survives comparisons across capital structures. It is dragged down by acquisitions, which is exactly the point.

Example: Northwind Tools earns $120M of EBIT taxed at 24%, so $91M, on $1,081M of invested capital: 8.4% ROIC against an estimated 8.1% WACC. Excluding goodwill it is 12.4%.

Related: invested-capital, wacc, economic-profit, return-on-capital-employed, return-on-equity

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