Return on Invested Capital (ROIC): formula and how to read it

Profit made on all money invested in the business. After-tax operating income divided by invested capital (total debt plus shareholders' equity).

Stock Meadow groups it under Profitability, and shows it in tables as ROIC.

ROIC = after-tax operating income ÷ invested capital, where invested capital = total debt + shareholders' equity

A company with $18 million of after-tax operating income and $100 million of total debt plus equity has a ROIC of 18%. The numbers are made up for illustration.

A higher ROIC means more profit for each dollar put into the business. A ROIC above the company's cost of capital means growth adds value; below it, growth destroys value.

When Stock Meadow ranks stocks, a higher figure scores better.

• Definitions vary. Stock Meadow divides after-tax operating income by total debt plus shareholders' equity and does not subtract cash, so figures differ from other sources.
• Not calculated for banks and insurers, and left blank when the reported figure is missing or implausibly large (beyond ±200%).
• Acquisition accounting, such as goodwill, changes invested capital and can depress ROIC for acquisitive companies.

How Stock Meadow handles gaps. Usually blank when the reported figure is missing or implausibly large (beyond ±200%).

Treat any single metric as one clue, and read the company's financial statements before drawing a conclusion. Stock Meadow's figures are research tools based on reported data, not investment advice.

Fixed-recipe models that score it: Magic Formula, GARP (Peter Lynch).

In Weighted ranking, Z-score composite and Balanced (no weak link), you choose the metrics and weights yourself, so you can include it in a custom score.

Read about every scoring model on the scoring models page.

• Return on Equity (ROE): profit made on shareholders' money.
• Earnings Yield: operating profit for each dollar of the whole company.
• Operating Margin: share of sales left after running the business.
• Net Debt to EBITDA: years of earnings needed to pay off debt.

What is a good ROIC?

Higher is better. A useful test is whether ROIC stays above the company's cost of capital. Compare with industry peers, because asset-light businesses naturally earn higher returns.

How is ROIC used in the Magic Formula?

Joel Greenblatt's Magic Formula ranks stocks on earnings yield and return on capital and adds the two ranks. Stock Meadow uses ROIC as its return-on-capital measure.

Is a higher or lower ROIC better?

When Stock Meadow ranks stocks, a higher figure scores better. That is a ranking convention, so read ROIC alongside other measures and compare similar companies.

Why is ROIC blank for some stocks?

It is usually blank when the reported figure is missing or implausibly large (beyond ±200%). Stock Meadow leaves the figure blank rather than guessing it.