An introduction into Return on Invested Capital (ROIC) for those who are unfamiliar with it (including me). ROIC measures how efficiently a company uses its capital and we have covered previously how growth may not always be good for a company. To generate returns, a company has to raise and invest in assets and such capital incurs cost (both direct and indirect). Value is only created when these returns exceed the cost of capital and one way to measure these returns is through ROIC.

Formula

After-tax operating income

Operating income is used as the ROIC measures the returns on all capital (both debt and capital). Comparatively, net income measures only the return to equity investors as it is net of interest expenses. However, operating income is not a typical line item included in your income statement. There are 2 ways in arriving at this numerator.

1) After tax operating income …