As a rough guide, a return on invested capital (ROIC) above 15% is good, above 20% is excellent, and below about 8–10% usually means the business is not earning more than its money costs. But the number that matters most is not one year's ROIC. It is whether the company keeps earning a high return, year after year, on the money it reinvests.
A quick reminder of what ROIC measures
ROIC tells you how much profit a business makes for every unit of money invested in it, by both shareholders and lenders. In words: take the operating profit after tax and divide it by the capital the business uses, which is roughly its equity plus its debt, minus spare cash.
ROIC = Operating profit after tax ÷ (Equity + Debt − Cash)
Example (invented numbers): a company has 500 of shareholders' equity and 300 of debt, and holds 100 of cash it doesn't need, so its invested capital is 700. Its operating profit after tax is 105. Its ROIC is 105 ÷ 700 = 15%.
If you want the full walkthrough of the formula and its variations, start with our explainer What Is ROIC?. This post focuses on the next question: what counts as a good result.
The benchmark: the cost of capital
The most important comparison for ROIC is the company's cost of capital. That is the return lenders and shareholders expect in exchange for providing money. Lenders expect interest. Shareholders expect a return that compensates them for the risk of owning the stock. Blended together, this cost often lands somewhere around 7–10% a year for a typical established company.
This gives ROIC its real meaning:
ROIC above the cost of capital: the business creates value. Every unit it reinvests is worth more than a unit once it has been invested.
ROIC roughly equal to the cost of capital: the business is treading water. Growth adds size, not value.
ROIC below the cost of capital: the business destroys value as it grows. The more it reinvests, the worse off its owners become.
That last point surprises people. Growth is only good when it is profitable growth. A company earning a 5% ROIC that doubles in size has simply put more money to work at a poor return.
What good ROIC looks like in practice
With the cost of capital as the floor, a rough scale looks like this:
Below 8%: weak. Usually at or below the cost of capital.
8–12%: adequate. The business probably covers its cost of capital, with little to spare.
12–20%: good. A clear sign the business has some advantage over competitors.
Above 20%: excellent, if it lasts. This often points to a strong brand, high switching costs, a network effect or a business that needs very little capital to grow.
These ranges shift by industry. Software and consumer-brand companies can earn ROICs of 30% or more because they need few factories or physical assets. Utilities, telecoms and heavy manufacturers often sit in single digits because they need enormous investment just to operate. A 9% ROIC can be respectable for a utility and poor for a software firm. Always compare a company with others in its own industry.
Why consistency matters more than the peak
A single year of high ROIC tells you very little. A strong economy, a temporary price spike or a one-off gain can push the figure up briefly. What you want to see is a high return that holds steady over five or ten years, including through a recession.
Example (invented numbers): Company A has earned an ROIC between 18% and 22% every year for ten years. Company B averaged 20% too, but swung between 5% and 40%. On paper their averages match. In practice, Company A is the far more dependable business, because its return reflects a lasting advantage rather than good timing.
Terry Smith, who runs one of the best-known quality-focused funds, has made consistently high return on capital a central test for the companies he owns. The reasoning is straightforward: a business that can keep reinvesting at a high return compounds its value over time, much like money in an account paying a high interest rate.
What ROIC doesn't tell you
Whether the stock is cheap. Excellent businesses with high ROIC are often priced to reflect it. A great business bought at too high a price can still be a poor investment.
Whether the company can reinvest. A high ROIC is most valuable when there are plenty of opportunities to reinvest at that rate. A company with a 40% ROIC but nowhere to put new money will grow slowly, and may return cash to shareholders instead.
Whether the figure is distorted. Large past write-offs can shrink the capital base and inflate ROIC. Heavy acquisitions can do the opposite, because the purchase price, including goodwill, sits in invested capital. Small capital bases can produce extreme percentages that look better than the business really is.
Anything useful about banks and insurers. For these companies, debt and customer deposits are raw material rather than financing, so the usual ROIC calculation breaks down. Return on equity and return on assets are more meaningful measures for financial companies.
The future. ROIC describes past performance. A competitor, a regulator or a change in technology can erode a high return quickly. The question is always whether the advantage behind it will last.
How to use ROIC in a decision
ROIC is one of the best tools available for judging business quality, as long as you use it as part of a wider check:
Look at ROIC over at least five years, and ideally ten, not just the latest year.
Compare it with the company's industry and with a rough cost of capital of 8–10%.
Ask what explains the return. If you can't identify the advantage behind a high ROIC, be cautious about assuming it will continue.
Check whether the company is growing and reinvesting at similar returns.
Only then turn to valuation, because quality and price are separate questions.
FAQ
Is a 10% ROIC good?
It is acceptable but not exceptional. For most companies, 10% roughly covers the cost of capital. For capital-heavy industries like utilities, it can be solid. For businesses that need little capital, it would be on the low side.
What is the difference between ROIC and ROE?
Return on equity (ROE) only counts shareholders' money. ROIC counts shareholders' and lenders' money together. A company can boost ROE simply by borrowing more, while ROIC is much harder to flatter with debt, which is why many investors prefer it.
Can ROIC be too high?
Not in itself, but very high figures deserve a closer look. Returns of 100% or more often come from an unusually small capital base, past write-offs or accounting quirks rather than a genuinely extraordinary business.
The short version
A good ROIC comfortably beats the cost of capital, holds up across many years and makes sense for the industry the company is in. It is one of the clearest signs of a strong business, and still only half of the investment question. The other half is the price you pay.
This article is for educational purposes only and is not investment advice.
