Which statement best defines ROIC as described in the material?

Which statement best defines ROIC as described in the material?

• A. Return on invested capital is Net income divided by invested capital
• B. Return on invested capital is Free Cash Flow divided by invested capital
• C. Return on invested capital is EBIT*(1-t) divided by (Debt + Equity - Cash)
• D. Return on invested capital is Revenue divided by total assets

Answer: (C)

ROIC shows how effectively a company turns every dollar of capital invested into after‑tax operating profit. The best definition uses EBIT multiplied by (1 minus the tax rate) as the numerator because this is operating income after taxes, and it excludes financing and non-operating items. The denominator should reflect the capital actually invested in the business, not idle cash, so it’s typically debt plus equity minus cash. In other words, after‑tax operating income divided by invested capital focuses on operating efficiency and capital usage, not on financing structure or non-operating cash. Other approaches mix in net income, free cash flow, or revenue, which blur the focus on operating performance relative to the capital employed.

ROIC shows how effectively a company turns every dollar of capital invested into after‑tax operating profit. The best definition uses EBIT multiplied by (1 minus the tax rate) as the numerator because this is operating income after taxes, and it excludes financing and non-operating items. The denominator should reflect the capital actually invested in the business, not idle cash, so it’s typically debt plus equity minus cash. In other words, after‑tax operating income divided by invested capital focuses on operating efficiency and capital usage, not on financing structure or non-operating cash.

Other approaches mix in net income, free cash flow, or revenue, which blur the focus on operating performance relative to the capital employed.