Return on capital
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Return on capital, also known as Return On Invested Capital (ROIC) is defined as
NOPLAT / Invested Capitalusually expressed as a percentage.
NOPLAT = Net Operating Profit Less Adjusted Tax - used to normalise effects of company's capital structure. It's the net profit with a few costs backed out, cost of interest and depreciation (accrual accounting of capital expenditures).
When the ROIC is greater than the cost of capital (usually measured as weighted average cost of capital), the company is creating value. When it is less than the cost of capital, value is destroyed. The cost of capital is just one of many costs in a company, so a company that has a profit on its income statement must by definition be "creating value".
See also
- Cash flow return on investment (CFROI)
- Cash return on gross investment (CROGI)
- Profitability
- Rate of profit
- Tendency of the rate of profit to fall
- Return on assets (ROA)
- Return on equity (ROE)
- Return on capital employed (ROCE)
- Return on invested capital (ROIC)
- Return on investment (ROI)
- Return on net assets (RONA)
- Return on revenue (ROR), also Return on sales (ROS)
- Risk adjusted return on capital (RAROC)
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