Return on invested capital or ROIC is the ability of a firm to generate profits from its total invested capital. We say total invested capital because it's not just from the equity holders which will just be return on equity. The way it's calculated is to set your EBIT , earnings before interest in tax, and then times it by one minus the tax rate. And then, you divide it all by invested capital. This numerator, the EBIT times one minus the tax, is sometimes called EBIAT, earnings before interest but after tax, or sometimes called NOPAT, net operating profit after tax.

Why do we need EBIT after tax? Well, we have to think about this as the profits from operations or the return available to financiers. And this income statement on the right-hand side here is really helpful to explain this. If we start with the operating profit or EBIT in the middle, initially we think, ah, that's the profit from operations that can be paid out to my invested capital, fantastic! But one of the figures underneath that is actually not going to be paid out to the invested capital and that's the tax expense. That has to go to the tax authorities. So what's left is earnings before interest but after tax and that's what can be paid out to my invested capital. Now that invested capital, the denominator in the formula, that's what's used to buy operating assets. Or alternatively, you can think of it as the invested capital from financiers. Let's just think where this might come from. Your finances invested capital could be your debt, plus your equity, but it could also include other sources of finance such as NCI or non-con controlling interests or your preference shareholders. They've all invested capital which is helping to generate EBIT. One complication here is if you have long-term cash sat at the bank. Imagine you've got debt and equity of 100, that's your funding, but only 95 of it has been spent on operating assets. Five of it has been left at the bank, unspent. So in this example, what is the figure that's actually generating EBIT? It's the 95. So one way of calculating your invested capital is take the 100 of debt and equity minus the five of cash sat at the bank.