What is ROIC?
Return on Invested Capital measures how effectively a company uses both its debt and equity to generate profits. It answers: “For every dollar invested in this business, how many cents come back as profit?”
An ROIC of 15% means the company generates 15 cents of profit for every dollar of invested capital. The long-term average for the S&P 500 is around 14%.
Why it matters for investors
ROIC is one of the best indicators of business quality. Companies that consistently earn an ROIC above their cost of capital are creating value. Companies earning below it are destroying value — even if they’re profitable on paper.
High-ROIC companies tend to have competitive advantages (what Warren Buffett calls “moats”) that protect their profits from competition. Think of strong brands, network effects, or high switching costs.
How Stock Analyzer scores it
| Score | ROIC | What it means |
|---|---|---|
| A | 15%+ | Highly efficient capital use |
| B | 10% – 15% | Efficient, above S&P 500 average |
| C | 5% – 10% | Below average efficiency |
| D | 0% – 5% | Poor capital allocation |
| E | Below 0% | Destroying value |
What to watch out for
The denominator in the ROIC calculation can be skewed, especially for companies returning to profitability after years of losses. This can lead to misleadingly high ROIC. Always check the trend over several years rather than a single snapshot.