Definition
ROIC measures the return on capital engaged in operating activity. A common analytical approach divides operating profit after a notional tax charge, NOPAT, by average invested capital. The composition of capital, lease accounting and the exclusion of excess cash can differ; there is no single universally applicable reporting formula.
Example
If notional NOPAT is 90 thousand roubles and average invested capital is 600 thousand, ROIC is 15%. In a model, an investor may compare it with the cost of capital, but only when the definitions, period and risk of the inputs are compatible.
Limitations
ROIC should not be confused with ROE: the first considers operating return on capital provided to the business, while the second relates to owners’ equity. A high figure may depend on a low accounting value for assets acquired long ago. Before drawing a conclusion, reconstruct the calculation, assess the durability of profit and consider whether additional investment could produce a comparable return.