Return on Invested Capital (ROIC)
Candlefocus EditorROIC effectively helps investors assess the growth potential of a company because it gives a real indication of how much cash the company is generating in regards to the full amount of money it has invested. A company with a high ROIC is typically using its capital very effectively - either through higher sales or through cost management - and it ultimately boosts shareholder value. On the contrary, a company with a low ROIC may assume that it is underperforming or just not utilizing its assets properly.
To measure a company's ROIC, investors need to obtain the company's NOPAT and invested capital. NOPAT is total operating profits after taxes are paid, and it represents a company's core profitability. Invested capital is the amount of capital the company has invested in the businesses, usually a combination of debt and equity.
When a company produces higher returns than the cost of the capital it has committed to its projects or investments, it is said to be creating and adding value to investors. A company with a higher ROIC than its weighted average cost of capital (WACC) is more desirable to potential investors, as it demonstrates that the company is able to outperform its cost of capital.
In conclusion, return on invested capital (ROIC) is a useful financial metric that investors can use to assess the growth potential of a company, as it indicates how well the company is using its capital to generate returns. A higher return on invested capital compared to its weighted average cost of capital is an indicator that the company is successfully adding value for their shareholders.