Return on Invested Capital (ROIC) calculator
About this calculator?
ROIC is a profitability/performance ratio metric that measures a business’s efficiency in allocating its resources to lucrative initiatives, simply it is the capital invested to generate profits. When a business’s ROIC is compared to its weighted average cost of capital (WACC), it may be determined whether or not invested capital is being used efficiently. This is used by benchmarking organizations to determine the worth of other businesses.
There are businesses that do not rely on operational income to pay all of their expenditures and create profit; instead, they use debt and equity to fund their operations. Investors, understandably, need to know what happens to the money that they have invested. Therefore, ROIC is the simplest approach to learn about the profit made from invested capital.
If this metric is high, it means that the business’s management is successful in creating revenue and that the funds spent are being used effectively. A poor ROIC, on the other hand, might be a red flag that the investors' money is not being put to good use and is instead being spent without generating more income.
Debt
Debt is the borrowing of funds from another individual/party/business. This can be utilised to finance significant purchases that they would not be able to make under normal circumstances. A debt agreement allows the borrowing party to borrow money on the condition that it be repaid at a later date, generally with interest.
Loans, such as mortgages, vehicle loans, personal loans, and credit card debt, are the most frequent types of debt. The borrower is obligated to return the loan balance by a particular date, usually several years in the future, according to the terms of the loan. The amount of interest that the borrower must pay yearly stated as a percentage of the loan amount is also specified in the loan conditions. Interest is used to reward the lender for taking on the risk of the loan, as well as to encourage the borrower to return the loan fast in order to reduce their overall interest expenditure.
Equity
Equity, also known as shareholders' equity or owners' equity in the case of privately owned corporations, is the amount of money that would be returned to a business’s shareholders if all of the business’s assets were liquidated and all of the debt was paid off in the event of a liquidation. It is the number of a business’s revenues less any obligations due by the company that were not transferred with the sale in the case of an acquisition.
EBIT
EBIT is a measure of a business’s profitability. Revenue minus costs, without taxes and interest, is EBIT. Operational earnings, operating profit, and profit before interest and taxes are all terms used to describe EBIT.
Invested Capital
Invested capital is the entire amount of money raised by a business by issuing securities, which is the sum of the business’s equity, debt, and capital lease obligations. Because debt, capital leases, and stockholder's equity are all recorded separately on the balance sheet, invested capital is not a line item on the financial statement.
NOPAT
NOPAT is a financial metric that illustrates how well a business fared after taxes, potential cash profits, in its core activities, if its capitalization were unleveraged, that is, if it had no debt. NOPAT is a more realistic look at operational efficiency for leveraged organizations and is widely utilized in economic value added (EVA) estimates. NOPAT does not account for the tax benefits that many businesses get as a result of current debt.
The metric excludes one-time losses and charges, which may not accurately reflect a business’s underlying profitability. Some of these costs may be related to a merger or acquisition, which, while they may influence the business’s bottom line that year, do not necessarily present a true picture of the business’s operations.
The end-goal.
The end-goal of utilising this calculator is to allow you to rapidly assess NOPAT from EBIT and the tax rate, along with debt, equity and invested capital figures to allow for the calculation of ROIC. Ultimately, this can deduce the potential or current profitability of a business.
Necessary terms.
Monthly operating income: This is an income measurement that shows how much of a business’s revenue will eventually become profits.
EBIT: An abbreviation of 'Earnings Before Interest and Taxes' referring to the net income before income tax expense and interest expenses are deducted.
Tax rate: This is the percentage amount needed for taxes.
NOPAT: An abbreviation of 'Net Operating Profit After Taxes' refers to the representation of a business's net operating profit after tax and no existing debt, which could be distributed to all shareholders and debt holders.
Debt: This is money borrowed in a lump sum, which is then paid back over time plus an agreed-upon amount of interest.
Equity: This is the value of assets and is a process of raising capital by selling shares in your business.
Invested Capital: This is the sum of all debt and equity on the balance sheet of a business.
ROIC: An abbreviation of 'Return on Invested Capital' referring to a ratio used as a measure of the profitability and value-creating potential of business's relative to the amount of capital invested by shareholders and other debtholders.
The formula.
Net Operating Profit After Taxes
Net Operating Profit After Taxes: NOPAT
Earnings Before Interest and Taxes: EBIT
Tax Rate: TR
NOPAT = EBIT * (1 - (TR / 100))
Return on Invested Capital
Return on Invested Capital: ROIC
Net Operating Profit After Taxes: NOPAT
Invested Capital: IC
ROIC = NOPAT / IC
Return on Invested Capital
Return on Invested Capital: ROIC
Net Operating Profit After Taxes: NOPAT
Debt: DT
Equity: EY
ROIC = NOPAT / (DT + EY)
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