Return on Invested Capital is one of the best metrics to understand how a business is doing. If a company is consistently hitting its ROIC then it will likely continue doing so, if not then it is likely not using its capital well.
Return on Invested Capital = (Net Income - Interest) / (Current Liabilities + Long-Term Debt + Common Stock + Retained Earnings + Cash From Financing + Cash From Investing)
Put more simply:
ROIC = Net Income / (Current Liabilities + Long-Term Liabilities + Total Equity)
One of the considerations is the cost of capital. If the cost of capital is high then it may not make sense to invest.
The reason to use this number:
- It tracks the effect of tax on deployment of capital
- It compounds. If you return say 10% the next year the investment is 110% if nothing is taken out of the company.