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Return on Incremental Invested Capital

What is Return on Incremental Invested Capital?

Return on Incremental Invested Capital is an efficiency metric used to measure the change in earnings as a percentage of incremental investments.

How to calculate Return on Incremental Invested Capital

ƒ Sum(Net Operating Profit After Tax in period 3) - Sum(Net Operating Profit After Tax in period 2) / Sum(Invested capital in period 2) - Sum(Invested capital in period 1)

Example

Consider a period of three years. In the first year, a company has $20,000 in invested capital and invests an additional $10,000 in the second year, giving an invested capital of $30,000 at the end of the second year. Also consider that the company's earnings increase from $9,000 to $10,000. The Return on Incremental Invested Capital would be ($10,000 - $9,000) / ($30,000 - $20,000) which is 10%.

More about this metric

Return on Invested Incremental Capital (ROIIC) measures the change in earnings in one period as a percentage of change in investment in the previous period. This metric is used to understand the impact of strategic investments on a company's finances. To calculate ROIIC, divide the change in your net operating profit after tax (NOPAT) in the current period by the change in invested capital (IC) in the previous period. ROIIC is essentially derived from Return on Invested Capital (ROIC), but is a more powerful metric than ROIC because of how it measures the change in earnings over time as a ratio with the change in investment.

High ROIIC is generally an indication that your business is capital efficient or has a higher operating leverage. It's important to know when tracking ROIIC that this metric is better suited to forecasting the trend of future returns rather than measuring current return on investment.

Additional Return on Incremental Invested Capital recommended resources

Read the full paper on calculating the return on invested capital.

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