Calculating Return On Invested Capital

What is Return On Invested Capital?

Return on Invested Capital (ROIC) in basic terms is the amount of profit that a company earns for every $1.00 of capital invested into the business.

Some analysts may substitute “growth rate” for ROIC in some instances.

How Do I calculate ROIC?

Return on invested capital is calculated by dividing the organization’s net income by the total of the shareholder’s equity and the outstanding debt.

Net Income/ Shareholder’s equity + Outstanding debt

How Do I Use Return on Invested Capital To Value A Stock?

In very simple terms, the ROIC should be compared against the company’s Price to Earnings ratio (P/E).

If the Return on Invested Capital is greater than the Price to Earnings Ratio, the stock would be considered to be undervalued and would be a value buy.

ROIC > P/E = Undervalued Stock

*This is a very simplified version of the metric, but could be used with additional data in developing an investing strategy and stock screen that works for your goals!

Many of our favorite Dividend Growth Stocks such as Scotiabank (BNS) have ROIC figures nearing 20%.

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