ROE and ROIC calculator
Both ratios measure what a business earns on the money tied up in it, and they disagree because they count different money. Return on equity is measured after interest has been paid; return on invested capital is measured before it, over a capital base that includes the debt. The gap between them is the gearing.
The two formulas
ROE = net income / shareholders equity
ROIC = operating income x (1 - tax rate) / (equity + total debt - cash)
The numerator of the second is after-tax operating profit, often written NOPAT: what the whole capital base earned before any of it was paid out to lenders. The tax rate is the effective one, income tax expense over income before tax. The denominator is invested capital, which is what shareholders and lenders have put in less the cash that is not being used by the business.
Illustrative inputs The calculator loads with invented round numbers sized so each division checks by hand: net income of 120 on equity of 800 is 15.00% exactly, and operating income of 190 taxed at the filed rate of 24.00% gives 144.40 over invested capital of 1100. Not any company's filed accounts. Replace all seven with the statements in front of you.
Two lines for the first ratio
The bottom line of the income statement, after interest, tax and everything below the operating line. Use the figure attributable to shareholders where the company reports a separate one for minority interests.
From the balance sheet, at the year end. Some readers use the average of the opening and closing balances, which is more defensible for a company that raised or returned a lot of capital during the year. Say which you used.
| Step | Value |
|---|---|
| Net income | 120 |
| Divided by shareholders equity | 800 |
| Return on equity | 15.00% |
Five more lines for the second
Earnings before interest and tax, from the income statement. This is the figure the whole capital base earned, before any of it was paid out to lenders, which is the reason it and not net income belongs on top of invested capital.
From the income statement. Used only to work out the rate that operating income is taxed at, so a one-off settlement or a released provision in this line distorts the return on capital rather than the tax charge.
Also from the income statement, immediately above the tax charge. Leave this and the line above blank and the effective rate falls back to 21 percent, and the table below says that it did.
Short-term and long-term interest-bearing debt from the balance sheet, including the current portion of long-term debt, which sits among the current liabilities and is easy to miss.
Subtracted, because cash sitting in a deposit account is capital the operating business is not using. Whether short-term investments count as cash is a judgement, and it moves the answer at a company holding a lot of them.
| Step | Value |
|---|---|
| Effective tax rate, tax expense over income before tax | 24.00% |
| Operating income after that rate | 144.4 |
| Invested capital, equity plus debt less cash | 1,100 |
| Return on invested capital | 13.13% |
| Measure | Value |
|---|---|
| Return on equity | 15.00% |
| Return on invested capital | 13.13% |
| Total debt over equity | 0.50 |
| Return on equity less return on invested capital | 1.87 points |
Negative equity prints n/m, not -60.00%
Take the example above and move shareholders equity to minus 200, leaving the profit where it is. The division still works. It returns -60.00%, and that figure is what a spreadsheet, a screener column and most calculators will show you for a company that made money.
This page returns n/m instead, and prints the reason where the number would have gone. Not meaningful is a different claim from not available: we have both figures and the ratio does not mean anything with them. A profitable company can report equity below zero after years of buying back stock above book value, and what a large negative percentage describes in that case is the buyback programme, not the return. The same happens after a large write-down or a spin-off. Ranking such a company at the bottom of a column sorted on return on equity would be publishing a judgement the arithmetic cannot support.
Return on invested capital usually survives that case, because debt is added back into its denominator. On the same figures it still reports 144.40%, which is one practical reason to compute the two together rather than either alone.
Reading the distance between them
On the illustrative figures the two are 15.00% and 13.13%, a gap of 1.87 percentage points against debt of 0.50 times equity. A wide gap at a heavily borrowed company says the returns a shareholder sees are being produced partly by the balance sheet rather than by the business, and the same gearing works in the other direction in a bad year.
A company with almost no debt whose two figures still differ is a different case: the gap there comes from cash, which is subtracted from invested capital but sits inside equity, and from everything between operating profit and net income. Reading the gap without checking which of the two you are looking at is how a cash-rich business gets mistaken for a geared one.
Neither figure means anything on its own until it is set against the cost of the capital that produced it. A business returning 9 percent on capital that costs it 11 is destroying value while reporting a positive return, and no ratio on this page can tell you that without the cost of capital next to it.
All seven are lines in an annual report
This is the only calculator here whose every input is filed. There is no forecast in it, no discount rate, and no market price. What there is instead is a set of choices about which line to use, and those choices move the answer.
| Input | Where it comes from |
|---|---|
| Net income | Income statement, bottom line. Where the company reports income attributable to non-controlling interests separately, use the figure attributable to the parent: the equity in the denominator is the parent's equity, and mixing the two measures a return on capital somebody else owns. |
| Shareholders equity | Balance sheet, at the year end. The average of the opening and closing balances is more defensible for a company that raised or returned a lot during the year, and it will not match a screener that used the closing figure. Say which you used. |
| Operating income | Income statement, before interest and tax. Watch what the company has put above this line: restructuring charges and impairments are operating items and excluding them produces an adjusted figure that is not comparable with an unadjusted denominator. |
| Income tax expense and income before tax | Income statement, the two lines around the tax charge. They exist here only to produce an effective rate. A one-off settlement or a released provision in the tax line distorts the return on capital through this route, which is not obvious from the output. |
| Total debt | Balance sheet, short and long term, including the current portion of long-term debt, which sits among the current liabilities and is the piece most often left out. |
| Cash and equivalents | Balance sheet. Subtracted, because cash on deposit is capital the operating business is not using. Whether short-term investments count as cash is a judgement and it is a large one at a company holding a lot of them. |
The one place this page fills something in for you
When the two tax lines are missing or unusable, the effective rate falls back to 21 percent, the US federal statutory corporate rate. That is a substitution and the table says so on the row, in the label, rather than folding it into the answer. A return on capital computed at a substituted rate is a slightly different claim from one computed at the filed rate, and the difference belongs where a reader can see it.
The rate is used as filed even when it comes out below zero or above one hundred, which happens with loss carry-forwards and released provisions. Correcting it would be this page inventing a number, so it prints the odd rate, warns, and lets you decide whether the year is usable.
Ten years of both, and an alert when one breaks
Inside the product both ratios are computed from filed accounts over ten years, with the same refusals and the same substituted tax rate, and each figure expands into the statement lines behind it. The part a calculator cannot do is the part after the arithmetic: writing down that your case rests on this company holding a return on invested capital above some level, and being told the day a new filing breaks it. It is a subscription and it wants a card for the trial, which is worth saying on a page that has just done the arithmetic for nothing. What it costs.
- WACC calculator computes the cost of the capital these returns are earned on, which is the figure a return on capital has to be read against.
- Methodology states how the product scores returns on capital, and what it stores when a ratio is not meaningful.
What this leaves out
These are ratios computed from figures you supply. Neither is a valuation, a view on any security, or advice. A high return on capital in one year says nothing about whether it persists, and persistence is the only part of it that is worth anything.
One year is a weak sample. A single large disposal, impairment or acquisition moves both ratios more than most of what the business did, and neither figure carries any information about how the return was funded.
Invested capital as defined here uses book values. At a company that has made large acquisitions the goodwill sitting in equity is capital that was genuinely spent, so excluding it would flatter the return; at one whose intangibles were built internally and expensed, the same denominator understates what was invested. The two are not comparable with each other and the ratio does not say so.
Banks and insurers are outside this. Their balance sheets do not separate operating capital from funding in the way invested capital assumes, and a return on invested capital computed for one of them is arithmetic without a meaning.
Nothing you type here is sent anywhere. The arithmetic runs in your browser and no input is stored, logged or transmitted.