# Return on capital

(Redirected from Financial return)

Return on capital (ROC) is a ratio used in finance, valuation, and accounting. The ratio is estimated by dividing the after-tax operating income (NOPAT) by the book value of invested capital.

## Formula

• $ROC = \frac{\textrm{Net Operating Profit} - \textrm{Adjusted Taxes}}{\textrm{BV of Debt} + \textrm{BV of Equity} - \textrm{Cash}}$

This differs from ROIC. Return on invested capital (ROIC) is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as net operating profit less adjusted taxes divided by invested capital and is usually expressed as a percentage. In this calculation, capital invested includes all monetary capital invested: long-term debt, common and preferred shares.

When the return on capital is greater than the cost of capital (usually measured as the weighted average cost of capital), the company is creating value; when it is less than the cost of capital, value is destroyed.

## ROIC formula

• $ROIC = \frac{\textrm{Net Operating Profit} - \textrm{Adjusted Taxes}}{\textrm{Invested Capital}}$

Note that the numerator in the ROIC fraction does not subtract interest expense, because the return is calculated for total capital, and not only equity capital.[citation needed]

Another way to look at ROIC:

Return on Invested Capital (ROIC) = (Earnings Before Interest & Taxes + Depreciation – CapEx) / (Net Working Capital + Net Fixed Assets)

This tells you how much cash a company generates in relation to the amount of capital tied up in its business. As ROIC numbers increase, all else being equal, a business gets better and better. The reason is that when you own a business, the higher your ROIC, the more money you are able to pocket every year in relation to the money you have invested in the business. [1]