Primeval Clothing Company makes everyday women’s clothing from all-natural fibers. The company’s EBIT is $98K, and its tax rate is 25%. That makes their net operating income after profit and tax $73,500.
$73,500 NOPAT = $98,000 EBIT x (1 – 0.25 tax rate)
The founders recently raised $25K to upgrade their sewing equipment. They also borrowed $295K to upgrade their warehouse. That brings their total invested capital is $320K. And now we can calculate the ROIC ratio as follows:
22.97% ROIC = $73,500 NOPAT / $320,000 invested capital
Primeval Clothing Company appears to be in good financial shape. They’re performing well according to this metric, but remember that ROIC doesn’t show a complete picture. You’ll need to compare the ROIC to industry averages. If you don’t have trustworthy industry numbers, you can compare cross-industry by using earnings before interest, taxes, depreciation, and amortization (EBITDA) in place of EBIT.