How to use the roic calculator
- Enter operating profit (EBIT) for a year.
- Enter the tax rate you want to apply to that profit. The default is an example, so use your own rate.
- Enter interest-bearing debt, shareholders equity and the excess cash that is not needed to run the business.
- Optionally enter a cost of capital to see the spread and the economic profit, then read the return on invested capital.
Formula
NOPAT = EBIT x (1 - tax rate)
Invested capital = debt + equity - excess cash
ROIC = NOPAT / invested capital
Spread = ROIC - cost of capital
Economic profit = NOPAT - cost of capital x invested capital
Cash is taken out because it earns a different return from the operating business. Other definitions add leases or remove goodwill, so compare only figures built the same way.
A company with $500 of operating profit
EBIT is $500 and the tax rate is 25%, so NOPAT is $375. Debt is $1,000, equity is $2,000 and excess cash is $200, so invested capital is $1,000 + $2,000 - $200 = $2,800.
ROIC is $375 / $2,800 = 13.39%. If the cost of capital is 9%, the spread is 4.39 points and the economic profit is $375 - 0.09 x $2,800 = $123.00.
What the return tells you
Return on invested capital asks how much operating profit a business earns on the money that funds it, from both lenders and owners. Because it is measured before interest, a company can be compared whether it is financed with debt or with equity. A return above the cost of that capital means the business creates value, and a return below it means it destroys value even if it reports a profit.
The spread over the cost of capital is the more useful number. A 13% return is good against a 9% cost and poor against a 15% cost. Economic profit turns the spread into dollars by multiplying it by the capital used.
Where the figures need care
Tax is applied to operating profit as if there were no debt, which is why the rate is a choice. Many analysts use the rate the company actually pays in cash taxes, or a normal statutory-style rate that they pick themselves. Capital can be measured at the start of the year, at the end or as an average, and the average is usually the fairest when the business is growing.
A single year can mislead, because a good year or a heavy investment year moves the number. Look at several years, and ask whether a change comes from profit or from the capital base.
Assumptions and limits
- The tax rate is your input. The page does not assume a rate.
- Excess cash is the amount you decide is not needed for operations, and it must be at most debt plus equity.
- Invested capital uses the balance sheet figures you enter, so use a consistent date or an average.
- All figures are examples. Nothing is uploaded.
Frequently asked questions
What is a good ROIC?
One that is above the cost of capital for the business. There is no single number, because the cost of capital and the industry differ.
Why subtract cash?
Cash that is not needed to run the business is not invested in operations, so the profit from operations should be compared with the capital that produces it.
How is this different from return on equity?
Return on equity uses net income and equity, so it depends on how much debt is used. ROIC uses operating profit before interest and the capital from both sources.
Can invested capital be negative?
It can when cash or other adjustments exceed debt plus equity. The page asks you to review the figures, because a return on a negative base has no useful meaning.