Return on capital less cost of capital (ROIC-WACC)
How far the return on invested capital sits above or below the estimated cost of that capital.
This is the value creation question stated directly. Above zero the business creates value; below zero growth destroys it.
How it is computed here
Return on invested capital - weighted average cost of capital
Combines more than one basis. See the note. The return side carries the mixed basis of the stored return on capital; the cost side is our estimate from last night's 10-year Treasury, the nightly beta and our 5.5% premium, not an observation. A spread near zero is inside the error of the estimate. Filed under quality. Higher is the stronger reading, other things equal.
The readings, and where the lines come from
| Range | Reading |
|---|---|
| below 0.0% | Growth destroys value |
| 0.0% to 5.0% | Barely covering the cost of capital |
| 5.0% to 15.0% | Creating value |
| 15.0% and above | Creating value at an exceptional rate |
The zero line is definitional rather than empirical: it is the point at which growth stops adding value.
When it misleads
- The cost of capital is our estimate from last night's 10-year Treasury, the nightly beta and our 5.5% premium. Treat the spread as indicative.
- A spread near zero is inside the error of the estimate.
Not meaningful for banks, insurers: the product prints n/m with the reason rather than a number for them.
Questions
How is return on capital less cost of capital calculated?
Return on invested capital - weighted average cost of capital. Combines more than one basis. See the note. The return side carries the mixed basis of the stored return on capital; the cost side is our estimate from last night's 10-year Treasury, the nightly beta and our 5.5% premium, not an observation. A spread near zero is inside the error of the estimate.
What does return on capital less cost of capital tell a value investor?
This is the value creation question stated directly. Above zero the business creates value; below zero growth destroys it.
When does return on capital less cost of capital mislead?
The cost of capital is our estimate from last night's 10-year Treasury, the nightly beta and our 5.5% premium. Treat the spread as indicative. A spread near zero is inside the error of the estimate.