The true operating performance of a firm is best measured by return on invested capital (ROIC), which measures the return on all capital invested in the firm regardless of the source of the capital. The formula for ROIC is deceptively simple: The numerator of this equation is easy: profits after taxes, but before interest costs. The denominator is a bit trickier, and although there are many different ways to calculate it, you’ll do just fine if you use this version: You may also want to subtract goodwill if it’s a large percentage of assets.
