What is ROIC from 120 NOPAT and 1,000 invested capital?
Reveal the worked answer
12%.
The definitions and uncertain hurdle must also be stated.
Fundamentals · FUND-06 · Core
Growth and reinvestment returns
Does becoming larger create owner value?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
Read first: Understand the business
Growth creates value when returns on the capital required exceed an appropriate capital cost. Expanding low-return projects can increase revenue and earnings while reducing economic value.
Study reinvestment efficiency as well as the growth rate.
Understand the mechanism
A simple ROIC measure divides after-tax operating profit by invested capital. Definitions must be consistent and the capital-cost comparison is uncertain.
Historical average returns can hide weak returns on new projects. Acquisitions and dilution also carry costs even when headline revenue accelerates.
Walk through the process
Estimate incremental capital needs and plausible returns. Tie forecasts to product economics and capacity rather than assuming unchanged efficiency.
Use scenarios for tax rates, margins and capital cost; do not present a precise model spread as a guaranteed value creation rate.
Evidence and decision boundary
These are original fictional teaching figures, not a company screen. Actual analysis should use primary disclosures and distinguish management's explanation from your inference. Favorable or unfavorable evidence depends on the specific business, valuation and risk; no single ratio establishes a recommendation.
A worked example
Harbor EBIT 150 with an illustrative 20% operating tax rate gives NOPAT 120. On 1,000 invested capital, ROIC is 12%. Against an assumed 9% capital cost, economic profit is 120−90=30.
A new 200-capital project at 6% earns 12 against an 18 capital charge, destroying six under that model despite adding accounting earnings. The graph varies return above and below the assumed hurdle.
Open the calculation without leaving this lesson
Growth and reinvestment returns—worked comparison
Vertical: Economic profit (USD millions)
Horizontal: ROIC assumption (%)
1. Fictional example
Read the graph as a data table
| ROIC assumption (%) | Fictional example |
|---|---|
| 6 | -30 |
| 9 | 0 |
| 12 | 30 |
| 15 | 60 |
What would invalidate the reading?
Buying growth at any price confuses expansion with value. Selectively excluding acquisition capital can inflate reported investment returns.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
Buying growth at any price confuses expansion with value. Selectively excluding acquisition capital can inflate reported investment returns.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: Does becoming larger create owner value? State the observed facts, the assumptions and the failure condition separately.
Sources, assumptions and downloadable script
External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.
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