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Encyclopedia > Return on capital

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

 NOPLAT / Invested Capital 

usually expressed as a percentage. In accounting, NOPLAT is an acronym for: Net Operating Profit Less Adjusted Taxes. ... A percentage is a way of expressing a proportion, a ratio or a fraction as a whole number, by using 100 as the denominator. ...

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). Capital expenditures (CAPEX) are expenditures used by a company to acquire or upgrade physical assets such as equipment, property, industrial buildings. ...

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". The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt (see the financing decision). ... The weighted average cost of capital (WACC) is used in finance to measure a firms cost of capital. ...

See also

  Results from FactBites:
Return on Invested Capital - ROIC (378 words)
Return on Invested Capital or ROIC calculation points out the profitability of a company’s equity and debt.
ROIC is a better indicator of stock quality and strength than Return on Equity because it takes a company’s debt into account.
That’s a three percentage points increase in total return on investment coming from Company B. Remember when you own equity in a firm, you are also responsible for any incurred debt.
Value Investing Encyclopedia: Return on Capital (466 words)
In most cases, return on capital (however computed) is a good indicator of the relative profitability of various firms.
Return on capital is also known as return on invested capital, and abbreviated as either ROC or ROIC.
The fact that a source uses the term “return on capital” (or ROC) rather than “return on invested capital” (or ROIC) is not a good indication that cash assets are being counted as capital.
  More results at FactBites »



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