Return on invested capital is a tool to assess the efficiency of a company’s investment in capital.
The formula of return on invested capital is
ROIC = NOPAT / Invested Capital
The NOPAT is net operating profit after taxes. That is calculated by multiplying operating profit with (1- effective tax rate). The invested capital is calculated by taking all the long-term liabilities and equity. In other words, Invested capital = Total assets – current liabilities.
Assume a company has an operating profit of $56,000 and a tax rate of 30%. The NOPAT will be $39,200. If the invested capital is $980,000, the ROIC will be
ROIC = $39,200 / $980,000 = 4%
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