Framework library
ROIC and economic profit
How to use it
Compare after-tax operating profit with invested capital. Evaluate whether returns exceed the relevant capital charge and whether incremental investment can sustain them.
Worked example
₹12 lakh of after-tax operating profit on ₹100 lakh of invested capital is 12% ROIC. At a 10% capital charge, economic profit is ₹2 lakh.
Common pitfall
Use consistent accounting treatment and explain major capital adjustments. Historical ROIC does not prove incremental returns.
- Frame the questionWhich unit, period and cost convention make the alternatives comparable?
- Apply the frameworkUse ROIC and economic profit on the worked example above.
- Produce an answerShow the base case, one downside and the threshold where the decision flips.
Apply it to a case
- Allocate capital between two Bathinda food lines
- Fund a motor redesign or distributor credit in Coimbatore?
Read the companion story: When a larger project earns less on the next rupee