Contribution | Palgrave Encyclopedia of Strategic Management | 2013

Return on Invested Capital (ROIC)

by Carliss Y. Baldwin

Abstract

Return on invested capital (ROIC) is a financial measure of the profitability of a firm or business unit. If it is greater than the business's cost of capital, then reinvestment of earnings increases shareholder VALUE. The ROIC also determines a maximum self-sustaining growth rate for the business in the absence of outside funding. Finally, for businesses engaged in Schumpeterian competition, innovators with an ROIC advantage can drive out their predecessors by making them unprofitable. In this fashion, relative ROIC determines an innovation's potential for 'creative destruction'.

Keywords: capital efficiency; competitive advantage; Dupont analysis; financial metrics; financial strategy; resource allocation; Schumpeterian competition; sustainable growth; valuation; value creation; Competitive Advantage; Financial Strategy; Resource Allocation; Valuation; Value Creation;

Citation:

Baldwin, Carliss Y. "Return on Invested Capital (ROIC)." Contribution to Palgrave Encyclopedia of Strategic Management, edited by David J. Teece and Mie Augier. Palgrave Macmillan, forthcoming.