The ROIC is always reflected as a percentile. It typically represents a trailing 12-month valuation or serves in an annualized reporting format.
Ideally, investors will closely compare the existing ROIC to the accruing cost of capital. This allows them to assess a company’s prospective value. The higher the ROIC value trends, the better the business is performing.
This value can be further benchmarked against other companies in the same industry, to better assess its effectiveness as an ongoing concern.
As a rule of thumb, if the ROIC is higher than the weighted average cost of capital (WACC), then a surplus in wealth exists. This means that the organization is proving itself to be productive and is fundamentally a valuable business model. Investors will pay premium rates to purchase company shares in such high-value businesses.
The most common benchmark used as a weighing measure, is a return of 2% above cost of capital. Anything less than 2% is perceived as a failing enterprise.
While some firms may actually have a zero-percentile return, they can still be relatively stable. However, they would nonetheless lack any capital to reinvest in the future expansion and advancement of the company. This makes them economically vulnerable.
Naturally, there are exceptions to these rules. Some industries value ROIC more than others due to the nature of their operations.
A banking institution values its ROIC metrics greatly. This is because they represent the perceived core operations and growth of the business. Their publicly traded shares will reflect the ROIC as a direct result of their financial performance.
Conversely, an industrial manufacturer may require intensive reinvestment of their existing capital. Hence, their own ROIC metrics will be vastly different from the banking institution mentioned prior. At times, they may be fully invested in acquiring new technology or infrastructure (which will leave them with little liquid capital during a cycle of expansion).
- The ROIC is always reflected as a numerical percentage. It represents a trailing 12-month valuation or can serve in an annual reporting format.
- Ideally, investors will compare the return on invested capital to the cost of capital (when assessing prospective value).
- The most common benchmark used as a weighing measure, is a return of 2% above cost of capital. Anything less than 2% is perceived as a failing or weakened enterprise.
- Due to the nature of their work, some industries heavily value their perceived ROIC, whereas others do not.