Return on Invested Capital (ROIC) by industry

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.

Average ROIC by Industry

The average ROIC varies significantly by industry. Here is a table showing the average ROIC by industries in the US as of Feb 2024:

Industry Average ROIC Number of companies
Advertising Agencies 6.4 22
Aerospace & Defense 6.9 50
Agricultural Inputs 7 11
Airlines 2.8 13
Apparel Manufacturing 8.5 17
Apparel Retail 6.7 29
Asset Management 3.7 73
Auto Parts 6.7 46
Auto & Truck Dealerships 7.6 14
Banks - Diversified 1.9 6
Banks - Regional 1.3 279
Beverages - Non-Alcoholic 22.3 9
Beverages - Wineries & Distilleries 7.1 9
Biotechnology -66.1 518
Broadcasting 5.3 16
Building Materials 13.6 7
Building Products & Equipment 15.8 31
Business Equipment & Supplies 10 7
Capital Markets 1.7 33
Chemicals 6.2 17
Communication Equipment -3 53
Computer Hardware 2.7 28
Conglomerates 1.5 12
Consulting Services 19.1 16
Consumer Electronics -10.1 12
Credit Services 2.8 45
Department Stores 3 5
Diagnostics & Research -27.6 67
Discount Stores 11.4 9
Drug Manufacturers - General 19.5 12
Drug Manufacturers - Specialty & Generic -37.9 50
Education & Training Services 9 16
Electrical Equipment & Parts 4.7 42
Electronic Components 8.3 30
Electronic Gaming & Multimedia -17.4 7
Electronics & Computer Distribution 11.6 6
Engineering & Construction 12.5 30
Entertainment 2.4 37
Farm & Heavy Construction Machinery 12.3 22
Farm Products 2.8 18
Food Distribution 6.6 9
Footwear & Accessories 12.7 11
Furnishings, Fixtures & Appliances 8.8 19
Gambling 9.9 11
Gold 1.7 27
Grocery Stores 7.2 10
Healthcare Plans -9.9 12
Health Information Services -10.7 33
Home Improvement Retail 5.2 7
Household & Personal Products 11.2 24
Industrial Distribution 16.9 17
Information Technology Services 13.7 54
Insurance - Diversified 3.4 11
Insurance - Life 1.3 16
Insurance - Property & Casualty 2.8 36
Insurance - Reinsurance 2.4 7
Insurance - Specialty 2.5 16
Integrated Freight & Logistics 12.4 15
Internet Content & Information 1.9 36
Internet Retail 6.6 22
Leisure 3 25
Lodging 11.3 9
Luxury Goods 8.8 5
Marine Shipping 7.7 24
Medical Care Facilities -7.5 39
Medical Devices -30.2 103
Medical Distribution 30.7 7
Medical Instruments & Supplies -17.9 45
Metal Fabrication 8.5 13
Mortgage Finance 2.1 17
Oil & Gas Drilling 9.5 6
Oil & Gas E&P 13 65
Oil & Gas Equipment & Services 9.4 44
Oil & Gas Integrated 11.4 6
Oil & Gas Midstream 10.1 37
Oil & Gas Refining & Marketing 10.6 18
Other Industrial Metals & Mining -3.6 15
Other Precious Metals & Mining -1.5 12
Packaged Foods 9 42
Packaging & Containers 9.1 22
Paper & Paper Products 1.3 5
Personal Services 8.5 10
Pharmaceutical Retailers -45.7 8
Pollution & Treatment Controls 7 7
Publishing 7 7
Railroads 6.1 8
Real Estate - Development 3.8 10
Real Estate Services 3.7 24
Recreational Vehicles 13.6 15
REIT - Diversified 2.7 17
REIT - Healthcare Facilities 2.6 16
REIT - Hotel & Motel 3.2 15
REIT - Industrial 3.8 16
REIT - Mortgage 0.4 35
REIT - Office 0.6 24
REIT - Residential 2.8 19
REIT - Retail 3.3 21
REIT - Specialty 3.9 15
Rental & Leasing Services 6.7 20
Residential Construction 14.1 21
Resorts & Casinos 6.4 18
Restaurants 6.5 41
Scientific & Technical Instruments 3.4 24
Security & Protection Services 13.9 14
Semiconductor Equipment & Materials 13.1 26
Semiconductors 3.2 64
Software - Application -8.5 192
Software - Infrastructure 0.3 89
Solar 2.6 13
Specialty Business Services 9.3 26
Specialty Chemicals 7.5 46
Specialty Industrial Machinery 15.6 73
Specialty Retail 7.6 42
Staffing & Employment Services 13.1 23
Steel 10.9 15
Telecom Services 0.9 33
Textile Manufacturing -5.2 4
Thermal Coal 25.1 9
Tobacco 18.6 6
Tools & Accessories 12.1 11
Travel Services 6 14
Trucking 12.8 12
Utilities - Diversified 4.2 15
Utilities - Regulated Electric 3.4 25
Utilities - Regulated Gas 4.5 14
Utilities - Regulated Water 4.5 12
Utilities - Renewable 4.2 11
Waste Management 4.1 12

The table shows that the Medical Distribution industry has the highest average ROIC of 30.7, followed by Thermal Coal at 25.1. In contrast, the Biotechnology industry has the lowest average ROIC of -66.1, followed by the Pharmaceutical Retailers at -45.7. This variation is due to several factors, including industry-specific earnings and growth prospects, and management's outlook on future performance

Industries with highest ROIC

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 30.7 7
Thermal Coal 25.1 9
Beverages - Non-Alcoholic 22.3 9
Drug Manufacturers - General 19.5 12
Consulting Services 19.1 16
Tobacco 18.6 6
Industrial Distribution 16.9 17
Building Products & Equipment 15.8 31
Specialty Industrial Machinery 15.6 73
Residential Construction 14.1 21

Industries with lowest ROIC

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 -66.1 518
Pharmaceutical Retailers -45.7 8
Drug Manufacturers - Specialty & Generic -37.9 50
Medical Devices -30.2 103
Diagnostics & Research -27.6 67
Medical Instruments & Supplies -17.9 45
Electronic Gaming & Multimedia -17.4 7
Health Information Services -10.7 33
Consumer Electronics -10.1 12
Healthcare Plans -9.9 12

Understanding ROIC Components

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.

ROIC by Industry Analysis

The utility of ROIC extends across industries, providing insights into the capital efficiency and competitive positioning of companies within diverse sectors:

  • High ROIC Industries: Industries like software, consumer goods, and pharmaceuticals often exhibit high ROIC figures. This is typically due to their ability to generate substantial operational profits with relatively lower levels of invested capital, a trait emblematic of industries where intellectual property and brand value play significant roles.
  • Low ROIC Industries: Conversely, asset-heavy industries such as utilities, transportation, and heavy manufacturing tend to report lower ROIC. These sectors are characterized by substantial capital expenditures required for infrastructure and equipment, leading to a larger base of invested capital and, consequently, lower returns on that capital.

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.

Factors Affecting ROIC

Several key factors influence a company's Return on Invested Capital, highlighting the nuances of operational and financial efficiency across industries:

  • Operational Efficiency and Profit Margins: The ability of a company to convert sales into profits, reflected in high NOPAT, directly impacts ROIC. Efficient cost management and strong pricing strategies enhance profit margins, contributing to higher ROIC.
  • Capital Structure: The mix of debt and equity financing affects the total invested capital. While debt can boost ROIC by increasing the capital base available for investment, excessive borrowing risks diminishing returns due to the cost of debt.
  • Asset Utilization: High asset turnover indicates efficient use of assets to generate revenue, positively affecting ROIC. This is particularly relevant in sectors where assets are a significant component of the operational model, such as manufacturing and retail.
  • Industry-Specific Risks: Regulatory changes, market volatility, and competitive pressures can all influence NOPAT and the amount of capital required to operate, thereby affecting ROIC.

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.