Many businesses do not rely on operating income to cover all their costs and profit, instead they use foreign capital, debt and equity.
Naturally, investors want to know what happens to the money they invest. The easiest way to learn profit from invested capital is to use ROIC. If the ROIC rate is high, it indicates that the management of the company is successful in increasing revenues and that the invested capital is used efficiently. On the other hand, low return on investment capital may be a warning sign that shareholders are not using the money properly, spending without an increase in revenues.
It is evaluated as 2% threshold value in ROIC ratio. If a business's ROIC is over 2%, it represents value for shareholders. If it is below 2%, the enterprise is called value destroyer.
ROIC is considered to be one of the most reliable indicators of the efficiency of investments, especially in the case of companies with large amounts of investment capital, such as mining companies or large production facilities. However, you should be aware that individual assets show total returns rather than performance. Based on ROIC only, it is impossible to select the most or least profitable investments.
If you are an entrepreneur, you may also be interested in another metric wacc - weighted average cost of capital , which gives you more information about financing your company.