Return on invested capital (ROIC) provides insight into some important concepts in business.1 One is the old saying that you must spend money to make money.2 “Spend money” recognizes a company has to make investments in people and assets before it can offer a viable good or service to the market. Invested capital, the denominator of ROIC, seeks to reflect the cumulative amount of that investment spending.
“Make money” is captured in net operating profit after taxes (NOPAT), the numerator of ROIC. ROIC is therefore how much money a company makes divided by how much it spends to make it. A high ROIC indicates that a company is generating a healthy level of profits on its investment.
