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Return on capital

Return on capital Definition

Return on Capital, also known as Return On Invested Capital (ROIC) is defined as:


NOPLAT / Invested Capital


usually 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 it's income statement must by definition be "creating value".








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