Return on Invested Capital

How to read it

stockrow works out return on invested capital by taking operating income times 0.625 — an approximation of operating profit after tax — and dividing it by invested capital: total shareholders’ equity plus long-term debt plus the current part of debt, less cash and short-term investments. For the trailing twelve months the balance-sheet items come from the latest quarter; for a year they come from that year’s balance sheet. The numerator rises with operating profit; the denominator rises when the company borrows, retains earnings or spends its cash, and falls when it pays down debt or builds up cash.

What is typical

Returns vary widely with the kind of business. Asset-light companies such as software and branded consumer businesses can earn high returns on little capital, while utilities, telecoms, airlines and heavy industry need large investment and usually earn less. Compare a company with the median for the company’s sector.

Pitfalls

The fixed multiplier of 0.625 is an assumption, not the company’s actual tax rate, so the figure drifts from reality for firms that pay much more or much less tax. stockrow shows the value as zero when invested capital is negative, which can happen when cash exceeds equity and debt or when buybacks leave equity below zero. Large cash balances shrink the denominator and can inflate the result.