Abbreviated as ROC, refers to a measure of how effectively a firm uses the money (borrowed or owned) invested in its operations.
Return on Invested Capital is equal to the following:
= net operating income after taxes / [total assets minus cash and investments (except in strategic alliances) minus non-interest-bearing liabilities].
- If the Return on Invested Capital of a firm exceeds its WACC, then the firm created value.
- If the Return on Invested Capital is less than the WACC, then the firm destroyed value.
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