When it comes to financial analysis, Return on Invested Capital (ROIC) is a crucial metric that determines how effectively a company is using its available capital (both equity and debt) to generate profitable growth. Simply put, ROIC measures the return a company generates on the capital invested in its business operations. The formula for ROIC is given by:
Return on invested capital (ROIC) = EBIT / Invested Capital
Where Invested capital is calculated as:
Invested capital = Debt + Assets - (Intangibles - Cash - Current Liabilities)
This metric is especially valued for its ability to provide a holistic view of a company's efficiency in generating returns from its total capital base, making it a crucial indicator for investors and managers.
The average ROIC varies significantly by industry. Here is a table showing the average ROIC by industries in the US as of Oct 2024:
| Industry | Average ROIC | Number of companies |
|---|---|---|
| Advertising Agencies | 6.3 | 24 |
| Aerospace & Defense | 8.5 | 53 |
| Agricultural Inputs | 3.6 | 11 |
| Airlines | 2.3 | 12 |
| Apparel Manufacturing | 5.5 | 16 |
| Apparel Retail | 9.1 | 29 |
| Asset Management | 4.2 | 76 |
| Auto Manufacturers | 10.8 | 16 |
| Auto Parts | 7.8 | 46 |
| Auto & Truck Dealerships | 2.4 | 14 |
| Banks - Diversified | 2 | 6 |
| Banks - Regional | 1 | 296 |
| Beverages - Non-Alcoholic | 20.6 | 12 |
| Beverages - Wineries & Distilleries | 6 | 7 |
| Biotechnology | -64.9 | 508 |
| Broadcasting | 0.9 | 15 |
| Building Materials | 14 | 9 |
| Building Products & Equipment | 19 | 29 |
| Business Equipment & Supplies | 9.7 | 7 |
| Capital Markets | 3.2 | 37 |
| Chemicals | 3.5 | 18 |
| Communication Equipment | -6.6 | 48 |
| Computer Hardware | 1.6 | 27 |
| Conglomerates | 8.7 | 13 |
| Consulting Services | 17.7 | 16 |
| Consumer Electronics | -12.8 | 12 |
| Credit Services | 3.2 | 45 |
| Department Stores | 9.4 | 5 |
| Diagnostics & Research | -24 | 64 |
| Discount Stores | 12.8 | 8 |
| Drug Manufacturers - General | 18.5 | 12 |
| Drug Manufacturers - Specialty & Generic | -29.1 | 47 |
| Education & Training Services | 16.6 | 17 |
| Electrical Equipment & Parts | 4.6 | 41 |
| Electronic Components | 7.1 | 32 |
| Electronic Gaming & Multimedia | 2.9 | 7 |
| Electronics & Computer Distribution | 12.6 | 5 |
| Engineering & Construction | 13.5 | 31 |
| Entertainment | 2.7 | 40 |
| Farm & Heavy Construction Machinery | 10 | 23 |
| Farm Products | 6.1 | 16 |
| Food Distribution | 7 | 9 |
| Footwear & Accessories | 12.5 | 11 |
| Furnishings, Fixtures & Appliances | 6.2 | 20 |
| Gambling | 11.8 | 11 |
| Gold | 2.6 | 28 |
| Grocery Stores | 7.1 | 10 |
| Healthcare Plans | -5.7 | 12 |
| Health Information Services | -33.6 | 34 |
| Home Improvement Retail | 5.9 | 7 |
| Household & Personal Products | 14.1 | 25 |
| Industrial Distribution | 15.8 | 17 |
| Information Technology Services | 15.6 | 53 |
| Insurance Brokers | 2.5 | 12 |
| Insurance - Diversified | 4.1 | 12 |
| Insurance - Life | 1.7 | 14 |
| Insurance - Property & Casualty | 3.6 | 37 |
| Insurance - Reinsurance | 3 | 7 |
| Insurance - Specialty | 2.5 | 17 |
| Integrated Freight & Logistics | 9 | 16 |
| Internet Content & Information | -2.9 | 39 |
| Internet Retail | 6.1 | 25 |
| Leisure | 5.5 | 26 |
| Lodging | 11.3 | 9 |
| Luxury Goods | 3.7 | 6 |
| Marine Shipping | 8.7 | 24 |
| Medical Care Facilities | -6.6 | 40 |
| Medical Devices | -23.9 | 95 |
| Medical Distribution | 35.6 | 7 |
| Medical Instruments & Supplies | -18.7 | 45 |
| Metal Fabrication | 8.2 | 13 |
| Mortgage Finance | 2.3 | 17 |
| Oil & Gas Drilling | 7.9 | 7 |
| Oil & Gas E&P | 10.4 | 61 |
| Oil & Gas Equipment & Services | 9.7 | 47 |
| Oil & Gas Integrated | 10.4 | 6 |
| Oil & Gas Midstream | 9.8 | 36 |
| Oil & Gas Refining & Marketing | 9.2 | 17 |
| Other Industrial Metals & Mining | -6.6 | 19 |
| Other Precious Metals & Mining | -2.3 | 13 |
| Packaged Foods | 10.5 | 42 |
| Packaging & Containers | 11.1 | 20 |
| Paper & Paper Products | 1.2 | 5 |
| Personal Services | 11.7 | 11 |
| Pharmaceutical Retailers | -22.6 | 7 |
| Pollution & Treatment Controls | 13.1 | 9 |
| Publishing | 8.1 | 7 |
| Railroads | 8.2 | 8 |
| Real Estate - Development | 2.3 | 10 |
| Real Estate Services | 4.2 | 25 |
| Recreational Vehicles | 7.2 | 13 |
| REIT - Diversified | 3 | 19 |
| REIT - Healthcare Facilities | 1.8 | 16 |
| REIT - Hotel & Motel | 3.6 | 15 |
| REIT - Industrial | 3.7 | 16 |
| REIT - Mortgage | 0.4 | 38 |
| REIT - Office | 0.8 | 24 |
| REIT - Residential | 2.7 | 18 |
| REIT - Retail | 3.1 | 24 |
| REIT - Specialty | 4.8 | 16 |
| Rental & Leasing Services | 5.4 | 19 |
| Residential Construction | 16.5 | 20 |
| Resorts & Casinos | 6.2 | 18 |
| Restaurants | 4.9 | 43 |
| Scientific & Technical Instruments | 13.4 | 24 |
| Security & Protection Services | 18 | 14 |
| Semiconductor Equipment & Materials | 11.7 | 25 |
| Semiconductors | 3.2 | 66 |
| Software - Application | 0.1 | 194 |
| Software - Infrastructure | 4.1 | 95 |
| Solar | -0.8 | 13 |
| Specialty Business Services | 12.2 | 26 |
| Specialty Chemicals | 8.9 | 44 |
| Specialty Industrial Machinery | 16.8 | 75 |
| Specialty Retail | 5.4 | 39 |
| Staffing & Employment Services | 10 | 23 |
| Steel | 3.9 | 15 |
| Telecom Services | 3 | 33 |
| Thermal Coal | 15.2 | 9 |
| Tools & Accessories | 14 | 10 |
| Travel Services | 4.7 | 12 |
| Trucking | 9.3 | 12 |
| Utilities - Diversified | 4 | 15 |
| Utilities - Regulated Electric | 3.5 | 25 |
| Utilities - Regulated Gas | 4.4 | 14 |
| Utilities - Regulated Water | 4.3 | 13 |
| Utilities - Renewable | 3.7 | 11 |
| Waste Management | 1.4 | 13 |
The table shows that the Medical Distribution industry has the highest average ROIC of 35.6, followed by Beverages - Non-Alcoholic at 20.6. In contrast, the Biotechnology industry has the lowest average ROIC of -64.9, followed by the Health Information Services at -33.6. This variation is due to several factors, including industry-specific earnings and growth prospects, and management's outlook on future performance
The following chart and table show the industries with the highest ROIC. You can filter the industries by sector in the chart below to see a breakdown of the top industries with the highest ROIC for every sector.
| Industry | Average ROIC | Number of companies |
|---|---|---|
| Medical Distribution | 35.6 | 7 |
| Beverages - Non-Alcoholic | 20.6 | 12 |
| Building Products & Equipment | 19 | 29 |
| Drug Manufacturers - General | 18.5 | 12 |
| Security & Protection Services | 18 | 14 |
| Consulting Services | 17.7 | 16 |
| Specialty Industrial Machinery | 16.8 | 75 |
| Education & Training Services | 16.6 | 17 |
| Residential Construction | 16.5 | 20 |
| Industrial Distribution | 15.8 | 17 |
The following chart and table present the industries with the lowest ROIC. Within the chart below, you can also refine the industries by sector, allowing you to observe a breakdown of the top industries with the lowest ROIC in each sector.
| Industry | Average ROIC | Number of companies |
|---|---|---|
| Biotechnology | -64.9 | 508 |
| Health Information Services | -33.6 | 34 |
| Drug Manufacturers - Specialty & Generic | -29.1 | 47 |
| Diagnostics & Research | -24 | 64 |
| Medical Devices | -23.9 | 95 |
| Pharmaceutical Retailers | -22.6 | 7 |
| Medical Instruments & Supplies | -18.7 | 45 |
| Consumer Electronics | -12.8 | 12 |
| Communication Equipment | -6.6 | 48 |
| Medical Care Facilities | -6.6 | 40 |
ROIC intricately combines two main components: EBIT and Invested Capital. EBIT (Earnings before interest and taxes) represents a company's net income (or profit) before paying interest and taxes. On the other hand, Invested Capital encompasses the sum of debt and equity financing used to fund the company's operations, offering a comprehensive view of the capital employed in generating profits.
This distinction is critical as it underscores ROIC's capability to evaluate the effectiveness of a company's core operations independently of how those operations are financed.
The utility of ROIC extends across industries, providing insights into the capital efficiency and competitive positioning of companies within diverse sectors:
The variation in ROIC across industries illuminates the diverse operational and financial landscapes companies navigate, influenced by factors such as capital intensity, competitive dynamics, and inherent industry profitability.
Several key factors influence a company's Return on Invested Capital, highlighting the nuances of operational and financial efficiency across industries:
High ROIC in the Software Industry: Consider a leading software company with minimal physical assets and significant intellectual property. Its lean operational model and high profit margins result in an impressive ROIC, showcasing the company's efficient capital use and strong market position.
Low ROIC in the Utilities Sector: A utility company, characterized by heavy infrastructure investment and regulated return rates, exhibits a lower ROIC. The significant capital required for operations dilutes the returns generated, reflecting the challenges of enhancing ROIC in capital-intensive industries.
These examples underscore how business strategies, industry conditions, and capital allocation decisions influence ROIC. They highlight the importance of understanding the operational and financial levers affecting ROIC within specific industry contexts.
Return on Invested Capital (ROIC) is a critical measure of how well a company uses its capital to generate profits. It is an invaluable tool for investors, managers, and analysts alike, providing insights into a company's efficiency and effectiveness at value creation. ROIC's importance transcends industries, offering a universal benchmark for financial performance and strategic decision-making.