How to use the ROIC and ROCE calculator
The ROIC tool works from figures in the annual report, in millions of dollars:
- Operating income (EBIT) from the income statement. Remove one-off items such as restructuring charges or gains on asset sales.
- Tax rate. The company’s normal effective rate, or 21% plus state taxes for a US company if you prefer a statutory rate.
- Total debt and shareholders’ equity from the balance sheet. Include lease liabilities in debt if they are large.
- Cash. Choose whether to subtract all cash, only the cash above what the business needs, or none.
- WACC, optional, to see the economic spread and the economic profit.
The ROCE tool needs EBIT, total assets and current liabilities. Revenue splits the result into margin and turnover, and a tax rate gives an after-tax version.
The formulas
NOPAT = EBIT × (1 − t)
Invested capital = Debt + Equity − Cash not needed in operations
Economic spread = ROIC − WACC
Economic profit = Spread × Invested capitalEBIT is operating income and t the tax rate. WACC is the weighted average cost of capital: the return that lenders and shareholders together require.
Capital employed = Total assets − Current liabilitiesCapital employed equals equity plus long-term liabilities. ROCE is a pre-tax measure.
A worked example
Company A reports operating income of $1,500M and pays tax at 21%, so NOPAT is $1.19B. It has $4,000M of debt, $6,000M of equity and $1,500M of cash. Subtracting all the cash leaves invested capital of $8.50B.
ROIC is 13.9%. Against a WACC of 8%, the economic spread is +5.94%, and the company earned $505.00M of economic profit: profit above the $680.00M its investors required on that capital.
On the ROCE tab, total assets of $14,000M less current liabilities of $3,000M leave capital employed of $11.00B. ROCE is 13.6% before tax, or 10.8% after tax.
Why ROIC above WACC creates value
Investors who supply capital expect a return on it: the WACC. A business that earns more than that on its capital is worth more than the money put into it; one that earns less is worth less, even if it reports a profit every year. Growth amplifies whichever is true. Reinvesting at a positive spread compounds value, while expanding at a negative spread destroys it faster.
Here is how Company A’s result changes with operating income, holding capital and the 8% WACC fixed:
| EBIT | ROIC | Spread over WACC | Economic profit |
|---|---|---|---|
| $700M | 6.5% | -1.49% | -$127.00M |
| $1,000M | 9.3% | +1.29% | $110.00M |
| $1,500M (the example) | 13.9% | +5.94% | $505.00M |
| $2,000M | 18.6% | +10.59% | $900.00M |
At $700M of operating income the company is still profitable, yet it falls short of its cost of capital: economic profit is -$127.00M a year, meaning investors would have been better off with that capital elsewhere at the same risk. Economic profit is the same idea as EVA; the EVA calculator works through it in more detail.
ROIC vs ROE vs ROCE
| ROE | ROIC | ROCE | |
|---|---|---|---|
| Profit | Net income (after interest and tax) | NOPAT (after tax, before interest) | EBIT (before interest and tax) |
| Capital | Shareholders’ equity | Debt + equity − excess cash | Total assets − current liabilities |
| Affected by leverage | Strongly | Barely | Barely |
| Compare with | Cost of equity | WACC | Other companies’ ROCE |
ROE answers what shareholders earn on their money, which leverage can inflate. ROIC asks how good the business is regardless of how it is funded. ROCE asks a similar question with simpler inputs, but because it is pre-tax it should not be compared directly with an after-tax WACC.
How the cash choice changes the answer
Cash sitting on the balance sheet earns little and is not needed to produce operating profit, so including it drags ROIC down. Company A’s ROIC is 13.9% with all cash subtracted, 13.2% if only cash above $500M is treated as excess, and 11.9% with no cash subtracted. For companies with large cash piles the difference can be much bigger, so state which method you used when comparing companies.
What this calculator does not include
The calculator uses the financing view of invested capital (debt plus equity). The operating view, which adds up working capital, fixed assets and intangibles, gives the same answer only when the balance sheet is fully adjusted. Goodwill from acquisitions sits inside equity, so ROIC includes the premium paid for acquired companies; some analysts show ROIC with and without it. Intangible investment such as research and brand building is expensed, not capitalized, which can make asset-light companies look more profitable than they are. Use average capital over the year where you can, and look at the trend over several years rather than a single figure.