The ratio is calculated by dividing the after tax operating income (NOPAT) by the average book-value of the invested capital (IC).
There are three main components of this measurement:[2] Some practitioners make an additional adjustment to the formula to add depreciation, amortization, and depletion charges back to the numerator.
In turn, depreciation represents the delayed expensing of the initial cash outflow that purchased the asset, and is thus a rather liberal accounting practice.
Because financial theory states that the value of an investment is determined by both the amount of and risk of its expected cash flows to an investor, ROIC and its relationship to the weighted average cost of capital (WACC).
In corporate finance, WACC is a common measurement of the minimum expected weighted average return of all investors in a company given the riskiness of its future cash flows.