ROIC: The Profitability Metric That Beats EPS in 2026

Return on Invested Capital (ROIC) is one of the best ways to measure business quality. It tells you whether a company creates real value from the capital it uses.

This article is part of our Complete Guide: How to Analyze a Stock.

What Is ROIC?

ROIC measures how efficiently a company converts invested capital into operating profit.


ROIC = NOPAT / Invested Capital

Where:

NOPAT = Net Operating Profit After Taxes
Invested Capital = Debt + Equity - Non‑operating cash

Why ROIC Matters More Than EPS

EPS can rise due to buybacks or accounting changes. ROIC shows economic value creation.

High ROIC companies can:

Reinvest at attractive rates
Grow without heavy dilution
Compound value over long periods

ROIC vs WACC (The Golden Rule)

To create value, a company must earn more than its cost of capital.

Scenario	Meaning
ROIC > WACC	Value creation
ROIC ≈ WACC	Neutral
ROIC < WACC	Value destruction

If you track free cash flow (read here), ROIC helps explain why cash flow is strong or weak.

How to Interpret ROIC

Rule of thumb:

> 15%: Excellent business
8–15%: Solid quality
< 8%: Mediocre or capital‑intensive

Always compare ROIC within the same sector.

Common ROIC Pitfalls

1. One‑time gains

Asset sales can inflate NOPAT. Check normalised earnings.

2. Understated capital

If a company uses aggressive accounting, invested capital may be too low, boosting ROIC artificially.

3. Cyclical businesses

ROIC swings with the cycle. Use multi‑year averages.

Sector Benchmarks (Approx.)

Sector	Typical ROIC
Software	15–30%
Consumer Staples	10–20%
Industrials	8–15%
Utilities	4–8%
Retail	6–12%

ROIC Quick Checklist

ROIC above 10% over 3–5 years
ROIC stable or rising
ROIC > WACC by at least 2–3 points
Growth not driven by excessive debt
Supported by healthy FCF and margins

How ROIC Fits in a Full Analysis

Combine ROIC with:

Valuation: P/E and FCF Yield
Risk: Beta and volatility (guide here)
Balance sheet: Debt ratios and interest coverage

Conclusion

If you want to identify compounding businesses, start with ROIC. It captures the efficiency that separates average companies from elite ones.

Next steps:

Use ROIC to screen your watchlist
Compare ROIC to sector peers
Re‑check ROIC each earnings season

Explore our 436 stock analyses to see ROIC metrics across sectors.