ROIC assesses the efficiency of a company in allocating the capital it controls to investments or projects that are reflected in the amount of profits generated. The ROIC indicator gives an impression of how well a company uses the money raised from equity and debt investors to generate returns. ROIC is just one of many metrics used to assess a company's performance – a key metric for us to track down investment opportunities.
Here ROIC is derived from a more well-known metric, the return on equity:
Return on equity (ROE) = Net profit / Equity capital
Total return on invested capital (ROIC) = Net operating profit after tax / Total capital
According to market estimates, ROIC will increase in the near future
ROIC can be used to assess how a company's profitability develops over time. Among other things, the ROIC metric can be used to determine whether a company has a strong market and competitive position compared to the industry. The average ROIC of different industries is shown in the chart below, with information on the average ROIC of the past five years and the expectations for the next two years (as of the end of June 2021). In the vast majority of sectors, significant increases in ROIC are expected in the coming years thanks to the economic recovery, for example in Citrix, Ericsson, Accenture, Bristol-Myers Squibb, ING or Keycorp, to name but a few examples. Analysts estimate that the ROICs will increase from a 5-year average that is currently around 10 percent, to around 13 percent on average. From today's perspective, there is only one exception to this generally positive expectation: the real estate industry.