What is ROIC (return on invested capital)?
Return on invested capital (ROIC) measures the after-tax profit a company earns on all the money put to work in the business, both debt and equity, expressed as a percentage. It shows how efficiently management turns invested capital into profit. Consistently high ROIC is a hallmark of a durable, high-quality business.
ROIC matters because it answers a simple question: for every dollar invested in the business, how much profit comes back each year? A company earning 20% on its capital is creating far more value than one earning 5%, as long as it can keep reinvesting at that rate.
The number is most telling next to the company's cost of capital, roughly what it pays to borrow and what shareholders expect. ROIC above that cost means the business creates value; below it, growth can actually destroy value. Steady, high ROIC over many years is one of the clearest signs of an economic moat.
| ROIC vs cost of capital | What it suggests |
|---|---|
| Well above | The business creates value as it grows; often a sign of a moat. |
| About equal | Growth is roughly value-neutral. |
| Below | Growth can erode value; the company's capital might earn more in other uses. |
Frequently asked questions
What counts as a good ROIC?
There is no universal cutoff, but many durable businesses earn ROIC comfortably above their cost of capital, often in the mid-teens percent or higher, and sustain it for years. What matters most is that it stays well above the cost of capital.
How is ROIC different from ROE?
ROE (return on equity) looks only at shareholders' capital, so heavy borrowing can flatter it. ROIC includes debt too, giving a cleaner read on how well the whole business uses money, regardless of how it is financed.