Organisations generally invest capital in acquiring industrial warehouses, machinery, research laboratories, offices, and other similar long-lived assets, as well as hiring personnel to manage, oversee the production process, and make purchases of raw materials, while also extending credit to their customers. Shareholders can provide financial resources through capital exhibitions, the generation and retention of profits or through the contracting of debt.

Assessing the return on capital invested in tangible and intangible resources is often complicated. ROIC is a financial metric that helps evaluate the return on capital invested by a company. (Damodaran, 2008). When seeking to measure the efficiency of capital invested, if the ROIC exceeds the cost of capital, the company is generating value.

ROIC is a key profitability metric in corporate finance that measures a company's efficiency in allocating its capital to profitable investments. ROI has been widely used in the financial literature by renowned researchers, advisors, and professionals, including Ben-David, Graham, and Harvey (2013); Furman and Orszag (2015); Koller (1994); and Koller, Goedhart, and Wessels (2017). In addition, Wall Street analysts have declared and promoted ROIC as the most crucial metric in finance (Benoit, 2016), catalogued as a key factor in capital allocation.

ROIC Advantage

The advantage of ROIC is that it measures investment capital as something more than physical capital (fixed assets and investments); research conducted by Doidge et al. (2018) shows that, over time, investment in total assets decreases in relation to investment in intangible assets. In addition, unlike traditional measures, ROIC examines the return on total capital invested and clearly shows whether a company is creating value for its shareholders.

In the evaluation of financial profitability, most traditional measures such as return on equity (ROE) and return on assets (ROA) are considered, which have limitations when measuring the value generated by companies in the long term from equity, these ratios have limitations when measuring the value generated by companies in the long term from equity These indicators take into account the net profits of the income statement and the balance sheet, but do not report on the total capital invested.

Calculation of ROIC

In the article "Return on Invested Capital: How to Calculate ROIC and Handle Common Issues", written by Michael J. Mauboussin and Dan Callahan, the terms of ROIC are defined and explained in a clear and precise way. They also show that this metric is calculated with the following formula:

Earnings Before Interest and Taxes (EBIT)* (1-Taxes) represents Net Operating Profit After Taxes (NOPAT), but before the financing cost income generated by investments made in operations. Therefore, the NOPAT is the return generated by the capital invested.

The authors state that understanding how a company generates its returns can guide the assessment of its sustainability, and knowing how a company generates an attractive ROIC can inform the analysis of its competitive strategy. The origin of the returns and the rationale of the plan were provided by breaking down the previous formula into NOPAT Margin and Turnover of Invested Capital.

Interpretation

Return on invested capital (ROIC) is typically used with two approaches:

1. Investments. In making asset allocation decisions. If different investment opportunities carry the same risk, the company should always invest in the proposition that offers the highest ROIC.

2. ROIC Vs WACC. When comparing the ROIC with the Weighted Average Cost of Capital (WACC) of the investment. If the return on the ROIC exceeds the expected return (WACC), the investment should be made.

3. Valuation multiples. If two companies are similar, but one has a higher ROIC, the company with a higher ROIC should, in theory, trade at higher valuation multiples, for example: (Share Price / Earnings Per Share) = P/E; (Total Enterprise Value)/(Earnings before interest, taxes, depreciation, and amortisation) = TEV /EBITDA, etc.

Proposals

In decision-making, the following is suggested:

a) If a company achieves a high ROIC thanks to a high NOPAT margin, the analysis should focus on differentiation.

b) If the company's high performance comes from a high turnover rate of invested capital, it is essential to analyse cost leadership.

Few companies have high NOPAT margins and high turnover rates of invested capital. Generally, these companies have advantages reinforced by economies of scale. Economic and financial indicators are helpful tools that benefit organisations by facilitating timely and appropriate decision-making about their corporate and financial strategies. Next, the evolution of key economic and financial indicators in the Mexican environment is described to facilitate informed decision-making related to personal and business strategies in an integrated manner.

1. National Consumer Price Index (INPC, Spanish)

2. The Price and Quotation Index of the Mexican Stock Exchange (IPC, Spanish)

3. Exchange rate

4. Equilibrium interbank interest rate (TIIE, Spanish)

5. CETES rate of return

6. Investment units (UDIS, Spanish)

1. NATIONAL CONSUMER PRICE INDEX (INPC)

Born in 1995, it reflects changes in consumer prices, measuring the general increase in prices in the country. It is calculated on a fortnightly basis by the Bank of Mexico and INEGI (2021). INPC is published in the Official Gazette of the Federation on the 10th and 25th of each month. The reference period is the second half of July 2018.

2. THE PRICE AND QUOTATION INDEX OF THE MEXICAN STOCK EXCHANGE (IPC)

Represents the change in the values traded on the Mexican Stock Exchange concerning the previous day to determine the percentage of rise or fall of the most representative shares of the companies listed therein.

3. EXCHANGE RATE

It is the value of the Mexican peso in relation to the dollar, calculated using the daily average of the five most important banks in the country, which reflects the spot price (cash) negotiated between banks. It is highly related to Inflation, the interest rate, and the Mexican Stock Exchange.

4. EQUILIBRIUM INTERBANK INTEREST RATE (TIIE)

On March 23, 1995, the Bank of Mexico, to establish an interbank interest rate that better reflects market conditions, released the Interbank Equilibrium Interest Rate through the Official Gazette of the Federation.

5. CETES RATE OF RETURN

6. INVESTMENT UNITS (UDIS)

The UDI is a unit of account of constant real value to denominate credit titles. It does not apply to checks, commercial contracts, or other commercial transactions.

CONCLUSION

ROIC provides key insights into the return and efficient utilisation of a company's capital investment, enabling you to:

1. Improve investment and growth strategy.

2. Optimise capital structure and reduce costs.

3. Compare the company's performance to that of its competitors.

4. Prevent financial errors that can compromise the business's stability.

ROIC, like any other valuation metric, is just a tool; it can reveal profitability, strategic or business plan discrepancies, but the metric does not prove anything on its own. It is suggested to complement and strengthen decision-making with additional indicators, valuation multiples, or scenario analysis to decide which companies, Tangible or intangible projects, or assets to invest in.

REFERENCES

BANXICO. (2025). Economic Information System. Banco de México. Link: https://www.banxico.org.mx/

Ben-David, I., Graham, J. R. & Harvey, C. R. (2013). Managerial miscalibration. Quarterly Journal of Economics, 128, 1547–1584. https://doi.org/10.1093/qje/qjt023

Benoit, D. (2016, May 3). The Hottest Metric in Finance: ROIC. The Wall Street Journal. https://www.wsj.com/articles/the-hottest-metric-in-finance-roic-1462267809

Damodaran, A. (2008). Return on Capital (ROC), Return on Invested Capital (ROIC) and Return on Equity (ROE), Measurement and Implications. Electronic. https://doi.org/10.2139/ssrn.1105499

Doidge, C., Kahle, K. M., Karolyi, G. A. & Stulz. R. M. (2018). Eclipse of the public corporation or eclipse of the public markets?, Journal of Applied Corporate Finance, Morgan Stanley. 30(1), 8-16.

Furman, J., & Orszag. P. (2015). A firm-level perspective on the role of rents in the rise in inequality. Presentation at “A Just Society” Centennial Event in Honor of Joseph Stiglitz. New York: Columbia University.

INEGI. (2025). Economic Information Bank. Mexico: National Institute of Geography and Statistics. Link: http://www.inegi.org.mx/sistemas/bie/

Koller, T. (1994). What is value-based management? McKinsey Quarterly.

Koller, T., Goedhart, M. & Wessels, D. (2017). Valuation: Measuring and managing the value of companies. John Wiley & Sons.

Mauboussin, M. J. & Callahan, D. (2022). Return on Invested Capital: How to Calculate ROIC and Handle Common Issues, Consilient Observer: Counterpoint Global Insights.

Información adicional

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