ROIC — return on invested capital — is the most honest number you can calculate about your business. More honest than EBITDA, more complete than net margin, more useful than ROE.
And yet, most industrial business owners have never calculated it. Not because it’s hard. But because no one taught them how.
Here’s the complete process.
What you need
- Income statement for the last year (or trailing 12 months)
- Balance sheet as of the same period-end
- One hour of your time
Step 1 — Calculate NOPAT
NOPAT is net operating profit after tax. It’s what your business generates before considering how it’s financed.
NOPAT = EBIT × (1 − tax rate)
If your EBIT was $20M and your effective tax rate is 30%:
NOPAT = $20M × 0.70 = $14M
Step 2 — Calculate invested capital
This is where most people get it wrong. Invested capital is not total assets. It’s the capital that actually works in the operation.
Include:
- Accounts receivable
- Inventory
- Net fixed assets (machinery, equipment, facilities)
- Other operating assets
Exclude:
- Cash and temporary investments
- Non-operating assets (unused land, investments in other companies)
- Accounts payable to suppliers (this reduces the capital you need to put in)
The formula:
Invested capital = Operating assets − Non-interest-bearing operating liabilities
Step 3 — Divide
ROIC = NOPAT / Invested capital
If your NOPAT was $14M and your invested capital is $100M, your ROIC is 14%.
Is that good or bad?
It depends on your cost of capital. A simple rule: if your ROIC is above 12–15%, your company is creating value. If it’s lower, it’s destroying value — even if EBITDA looks good.
For mid-market industrial companies, a ROIC above 18–20% is excellent. Between 10–15% is acceptable. Below 10%, there’s work to do.
What the number tells you
A low ROIC can come from two places:
- Low operating margin — your pricing, costs, or product mix aren’t right
- Low capital turnover — you have too much capital tied up in inventory, receivables, or underutilized assets
Identifying which one is the problem determines exactly which lever to pull.
At Sintelo we calculate your current ROIC, decompose it into its parts, and tell you exactly where the biggest improvement opportunity lies.