Return on invested capital
DCFAfter tax operating profit divided by the capital employed to produce it, the cleanest measure of whether a business creates value.
Also written: ROIC
ROIC is NOPAT divided by invested capital, where invested capital is broadly debt plus equity less cash, or equivalently net working capital plus net fixed assets. It answers what the business earns on every euro tied up in it.
The number only means something against the cost of capital. A company earning 15% ROIC against a 9% WACC creates value with every euro it reinvests; one earning 6% destroys value by growing, which is why growth is not automatically good.
It is capital structure neutral by construction, since NOPAT is taxed as if unlevered and invested capital includes both debt and equity. That makes it comparable across companies in a way return on equity is not.
Sustained high ROIC is the quantitative signature of a competitive moat, because ordinary competition drives returns toward the cost of capital. A company holding 20% returns for a decade is telling you something structural is stopping entrants.
Worked example
NOPAT of 120 on invested capital of 800 is a 15% ROIC against a 9% WACC.
Every euro reinvested creates 6 cents of value a year, so growth is worth having. A competitor earning 6% destroys value by growing, and should return cash instead.
That is why growth is not automatically good, and why sustained high ROIC is the quantitative signature of a moat: ordinary competition drives returns toward the cost of capital.