ROIC is NOPAT divided by invested capital.
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First calculate NOPAT (net operating profit after tax) by multiplying EBIT by one minus the tax rate. A company with $200,000 in EBIT and a 25% tax rate has NOPAT of $200,000 times 0.75, or $150,000. Then divide NOPAT by invested capital, the total of debt and equity actually funding the business's operations, to get ROIC. Against $1,000,000 in invested capital, that $150,000 in NOPAT is a ROIC of 15%.
Invested capital is usually defined as total debt plus total equity, sometimes minus excess cash that is not being used to fund operations. Using NOPAT rather than net income keeps the ratio focused purely on operating performance, since NOPAT excludes the effect of how the company happens to be financed.
A ROIC figure on its own does not say whether a company is actually creating value. The number that matters is the gap between ROIC and WACC (weighted average cost of capital), the blended rate a company pays to raise its debt and equity funding. When ROIC is higher than WACC, the business earns more on its invested capital than it costs to raise that capital, and it is genuinely creating economic value.
When ROIC sits below WACC, the company is technically operating at a loss in economic terms even if net income is positive, since the capital tied up in the business could earn more elsewhere at a similar risk level. Investors and analysts often use ROIC minus WACC, sometimes called economic spread, as a cleaner signal of value creation than ROIC in isolation.
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