What is the formula for Return on Invested Capital (ROIC)?

Return on Invested Capital (ROIC) is a financial metric used to assess a company's efficiency at allocating the capital under its control to profitable investments. It specifically measures the return generated on the total capital that has been invested in the business, typically focusing on earnings before interest and taxes (EBIT) adjusted for taxes.

The correct formulation for ROIC incorporates EBIT and takes into account the effective tax burden on those earnings, which provides a more accurate representation of the net profits attributable to the capital invested. Thus, calculating (EBIT - Taxes) evaluates the actual earnings generated after tax burdens from the core operations of the business. The denominator, Average Invested Capital, reflects the total amount of capital that has been employed in the business over a specific period, making the calculation a strong indicator of how well the company is using its capital to generate profits.

This understanding of ROIC is essential for making informed investment decisions, as it indicates how effectively a company is using its capital to generate earnings relative to the investments made.