ROIC

Return on invested capital divides net operating profit after tax (NOPAT) by invested capital — the sum of debt and equity employed in the business, less any excess cash that is not operating in nature. ROIC is the cleanest single measure of how efficiently a business converts capital into operating profit, and the spread between ROIC and WACC is the rate at which it creates economic value. A business with 25% ROIC against an 8% WACC is creating 17 cents of economic value on every dollar of incremental capital employed; a business with 6% ROIC against the same 8% WACC is destroying value, even if accounting earnings are positive. ROIC trends matter as much as levels. A rising ROIC profile typically signals operating leverage, pricing power, or scale advantages crystallizing into structural margins; a declining profile signals competitive intensity, capital cycle effects, or under-earning legacy investments. We compute ROIC on a five-year trailing basis to smooth one-time effects, exclude goodwill from invested capital where acquisitions distort the denominator, and report both ROIC and ROIIC (return on incremental invested capital) for businesses in active reinvestment phases. ROIC durability is the single most reliable predictor of long-run shareholder returns in our experience.