ROIC stands for return on invested capital — a financial indicator that answers one essential question: is the money invested in a business, whether by shareholders or through borrowing, being used efficiently and generating an adequate return?
Unlike better-known indicators such as ROI, ROIC assesses a company's capital structure more comprehensively. This means taking into account both equity and third-party resources deployed in the business's operations.
For small and medium enterprises, understanding ROIC is particularly important before seeking new investment, expanding operations, or evaluating whether the effort being made is generating results that justify the commitment compared with other investment alternatives available in the market.
ROIC reveals how effectively a company converts invested capital into returns. The indicator shows whether resources are being used productively or whether inefficiencies exist. In doing so, it helps identify bottlenecks and improvement opportunities, while also guarding against decisions that could jeopardise the future of the business.
How to calculate your company's ROIC?
The ROIC formula may appear complex at first glance, but it becomes relatively straightforward once its components are understood.
The calculation rests on two main elements:
NOPAT (net operating profit after tax): represents the result generated by the company's core operations after accounting for income taxes.
Invested capital: corresponds to the capital deployed in the company's activities, including equity and third-party resources used to finance operations.
The ROIC formula is:
ROIC = (NOPAT ÷ Invested Capital) × 100
The result is expressed as a percentage, which makes it easy to compare with other investments or with existing financing costs in the market.
Understanding each component of the calculation makes it easier to identify improvement opportunities and to recognise when adjustments to the company's financial management are required.
Step-by-step guide to calculating ROIC in a small business:
Determine the annual operating result, before accounting for financial charges and taxes.
Subtract income taxes from the operating result to obtain the NOPAT.
Add the capital contributed by shareholders to the outstanding balance of loans and financing used to fund the business's operations.
Divide NOPAT by invested capital and multiply by 100 to obtain the ROIC.
Source: Serasa Experian
Source: Diário Económico
Original article: https://www.diarioeconomico.co.mz/?p=537911
