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ROIC vs. WACC Analysis

For informational and educational purposes only • Not investment advice.

Compare economic value creation across companies

Nvidia
ROIC Spread99.8%

Strong value creation

ROIC115.1%
WACC15.2%
Economic Profit$167.7B
Invested Capital$168.0B
Detailed valuation
Apple
ROIC Spread89.3%

Strong value creation

ROIC99.6%
WACC10.3%
Economic Profit$115.6B
Invested Capital$129.5B
Detailed valuation
Alphabet
ROIC Spread37.3%

Strong value creation

ROIC48.0%
WACC10.6%
Economic Profit$190.7B
Invested Capital$510.8B
Detailed valuation
Microsoft
ROIC Spread22.0%

Strong value creation

ROIC32.2%
WACC10.2%
Economic Profit$93.1B
Invested Capital$422.4B
Detailed valuation
Equity Risk Premium
%
Range: 2–10%

What is ROIC vs. WACC Analysis?

ROIC vs. WACC Analysis measures whether a company creates or destroys economic value by comparing its Return on Invested Capital (ROIC) with its Weighted Average Cost of Capital (WACC).

ROIC measures the return generated from the capital invested in the operating business, while WACC represents the return required by shareholders and lenders. A positive ROIC Spread indicates value creation because the company earns more than its cost of capital, whereas a negative spread indicates value destruction.

This relationship is closely connected to the Economic Value Added (EVA) framework. Multiplying the ROIC Spread by Invested Capital produces Economic Profit, which measures the value created after accounting for the cost of the capital employed in the business.

Unlike the full EVA valuation model, ROIC vs. WACC Analysis does not forecast future Economic Profit or estimate Fair Value per Share. Instead, it evaluates the company's current ability to create economic value from its invested capital.

ROIC & WACC Formulas

ROIC Spread compares the Return on Invested Capital (ROIC) with the company's Weighted Average Cost of Capital (WACC) to evaluate whether the business is creating or destroying economic value.

Net Operating Profit After Tax (NOPAT)
NOPAT=EBIT×(1−T) \text{NOPAT} = \text{EBIT} \times (1-T)
Net Debt
Net Debt=Total Debt−Cash & Short-Term Investments \text{Net Debt} = \text{Total Debt} - \text{Cash \& Short-Term Investments}
Invested Capital
Invested Capital=Shareholders’ Equity+Net Debt \text{Invested Capital} = \text{Shareholders' Equity} + \text{Net Debt}
Return on Invested Capital (ROIC)
ROIC=NOPATInvested Capital \text{ROIC} = \frac{\text{NOPAT}} {\text{Invested Capital}}
Weighted Average Cost of Capital (WACC)
WACC=wErE+wDrD(1−T) \text{WACC} = w_Er_E + w_Dr_D(1-T)
ROIC Spread
ROIC Spread=ROIC−WACC \text{ROIC Spread} = \text{ROIC} - \text{WACC}
Economic Profit
Economic Profit=(ROIC−WACC)×Invested Capital \text{Economic Profit} = (\text{ROIC}-\text{WACC}) \times \text{Invested Capital}

How ROIC vs. WACC Analysis Works

The ROIC vs. WACC analysis compares the return generated on invested capital with the return required by shareholders and lenders. It calculates ROIC and WACC, measures the difference between them, and converts that spread into an estimate of Economic Profit.

Calculate NOPAT & Invested Capital
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Calculate ROIC
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Estimate Cost of Equity & Debt
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Calculate WACC
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ROIC − WACC = ROIC Spread
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Economic Profit & Value Creation

Step 1 — Calculate Return on Invested Capital (ROIC)

NOPAT = EBIT × (1 − Tax Rate)
Net Operating Profit After Tax (NOPAT) measures after-tax operating profit before financing costs.
Net Debt = Total Debt − Cash
Net Debt measures the company's debt after deducting cash and cash equivalents.
Invested Capital = Shareholders' Equity + Net Debt
Invested Capital represents the capital employed in the operating business.
ROIC = NOPAT / Invested Capital
Return on Invested Capital (ROIC) measures the after-tax operating profit generated for each dollar invested in the business.

The model first calculates Net Operating Profit After Tax (NOPAT) using trailing twelve-month (TTM) EBIT and tax data when available; otherwise, the latest annual values are used. It then estimates Invested Capital and divides NOPAT by Invested Capital to calculate Return on Invested Capital (ROIC). ROIC measures how efficiently a company generates after-tax operating profit from the capital employed in its business.

Step 2 — Calculate Weighted Average Cost of Capital (WACC)

Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium
The Cost of Equity is estimated using the Capital Asset Pricing Model (CAPM).
Cost of Debt = Interest Expense / Total Debt
The Cost of Debt reflects the company's estimated borrowing cost.
WACC = Equity Weight × Cost of Equity + Debt Weight × Cost of Debt × (1 − Tax Rate)
WACC combines the required returns of shareholders and lenders according to their weights in the company's capital structure.

The model estimates the Cost of Equity using CAPM, with the Risk-Free Rate providing the baseline required return. The Risk-Free Rate is based on the U.S. 10-Year Treasury yield published by the Federal Reserve Board. The Cost of Debt is estimated using trailing twelve-month (TTM) Interest Expense when available; otherwise, the latest annual Interest Expense is used. The model then adjusts the Cost of Debt for taxes and combines the Cost of Equity and After-Tax Cost of Debt according to each company's capital structure to calculate WACC.

Step 3 — Calculate ROIC Spread and Economic Profit

ROIC Spread = ROIC − WACC
ROIC Spread measures whether the company's operating returns exceed its cost of capital.
Economic Profit = ROIC Spread × Invested Capital
Economic Profit estimates the value created after covering the full cost of capital.

The final step compares Return on Invested Capital (ROIC) with the Weighted Average Cost of Capital (WACC) to determine whether the company creates or destroys economic value. Multiplying the resulting ROIC Spread by Invested Capital estimates the company's Economic Profit.