What is Return on Invested Capital (ROIC)?
Return on Invested Capital (ROIC) is a profitability ratio that measures how efficiently a company generates after-tax operating profit from all its invested capital, including both debt and equity. ROIC is widely used in valuation because it is comparable across capital structures and indicates whether the company is creating economic value relative to its cost of capital.
How It Works
- Compute NOPAT (Net Operating Profit After Tax) = EBIT * (1 – tax rate).
- Compute Invested Capital = Total Debt + Total Equity – Cash and Equivalents.
- ROIC = NOPAT / Invested Capital.
- Compare ROIC with WACC: ROIC > WACC creates value; ROIC < WACC destroys it.
- Combine with growth and reinvestment rate to forecast value creation.
Saudi Context
PIF, Saudi sovereign wealth fund advisors, and CMA-listed corporates use ROIC alongside ROE in capital allocation decisions. The Saudi WACC range of 9-12% is the typical hurdle: businesses below this destroy value over time. Vision 2030 transformation investments are evaluated on the trajectory of ROIC over the build-out and stabilization periods.
Example
A company with EBIT of SAR 60 million, tax rate 20%, total debt SAR 200 million, equity SAR 300 million, and cash SAR 50 million. NOPAT = 60 * 0.8 = 48m. Invested capital = 200 + 300 – 50 = SAR 450 million. ROIC = 48 / 450 = 10.67%. With a WACC of 9%, the company creates value at the margin.