Blog · Finance metrics and formulas · Finance and FP&A teams
Compare industry ROIC only after aligning the earnings, tax and capital definitions. This worked example uses supplied hypothetical US peers to separate operating margin, capital intensity and goodwill effects.
Return on invested capital by industry is useful only when the peers share a consistent definition of profit and capital. Capital-intensive operations can earn lower ROIC than businesses needing fewer recorded assets, even when their operating margins are strong. Start with comparable inputs and a dated reference, then explain the gap.
Aswath Damodaran's US return-on-capital dataset, dated January 2026, separates pretax and after-tax results and shows versions adjusted for leases and research spending. Those columns describe different measures; choosing the highest or closest percentage produces an unreliable comparison.
Record the publication date, underlying financial period, country, industry classification, company population, tax method and capital convention. Also record whether the industry figure is a median, a simple mean or a ratio of totals. A diversified manufacturer's consolidated figure may be a poor match for a specialized business unit.
The example below teaches a reproducible comparison using hypothetical supplied peer schedules. Its percentages are calculated examples, not observed industry averages or current market benchmarks. The general ROIC guide covers the underlying measure in more detail.
For this comparison, annual net operating profit after tax, or NOPAT, is operating profit multiplied by one minus the supplied tax rate. Invested capital is book debt plus book equity minus cash. The denominator is the average of opening and closing invested capital.
NOPAT = Operating profit × (1 − Tax rate)
Invested capital = Book debt + Book equity − Cash
ROIC = Annual NOPAT / Average invested capital
Damodaran's variable definitions describe after-tax operating income over book debt plus equity less cash, and sector returns calculated from aggregate inputs. Our illustration adds an explicit opening-and-closing average; do not assume a published series uses that same averaging method.
The supplied debt schedules include interest-bearing borrowings and finance lease obligations. Operating leases remain on the reported accounting basis, with no additional analytical lease adjustment. Goodwill remains included through book equity, and no research spending is analytically capitalized. All reported cash is subtracted in this convention; an approach retaining required operating cash needs a separately labeled reconciliation.
Consider three hypothetical US companies: a distributor, a manufacturer and a software business. Each reports the calendar year ending December 31, 2025. A common assumed tax rate isolates operating and capital differences; it is an analytical input, not a claim about the companies' actual taxes.
| Annual input | Distributor | Manufacturer | Software business |
|---|---|---|---|
| Revenue (USD) | 10,000,000 | 10,000,000 | 10,000,000 |
| Operating profit (USD) | 1,000,000 | 1,500,000 | 2,000,000 |
| Assumed tax rate | 25.00% | 25.00% | 25.00% |
| Capital input (USD) | Distributor | Manufacturer | Software business |
|---|---|---|---|
| Opening debt | 2,000,000 | 4,000,000 | 0 |
| Opening equity | 3,000,000 | 5,000,000 | 5,000,000 |
| Opening cash | 1,000,000 | 1,000,000 | 2,000,000 |
| Closing debt | 2,200,000 | 4,500,000 | 0 |
| Closing equity | 3,300,000 | 5,500,000 | 5,500,000 |
| Closing cash | 1,100,000 | 1,000,000 | 2,000,000 |
Keep the source line and statement date beside each imported balance. Debt and cash schedules must reconcile to the balance sheet, while operating profit must tie to the income statement before any documented adjustments. The invested capital guide explains the denominator separately.
All amounts below follow from those inputs. Percentages are rounded to two decimals; use unrounded results for subsequent calculations.
| Step | Distributor | Manufacturer | Software business |
|---|---|---|---|
| NOPAT (USD) | 1,000,000 × (1 − 25%) = 750,000 | 1,500,000 × (1 − 25%) = 1,125,000 | 2,000,000 × (1 − 25%) = 1,500,000 |
| Opening capital (USD) | 2,000,000 + 3,000,000 − 1,000,000 = 4,000,000 | 4,000,000 + 5,000,000 − 1,000,000 = 8,000,000 | 0 + 5,000,000 − 2,000,000 = 3,000,000 |
| Closing capital (USD) | 2,200,000 + 3,300,000 − 1,100,000 = 4,400,000 | 4,500,000 + 5,500,000 − 1,000,000 = 9,000,000 | 0 + 5,500,000 − 2,000,000 = 3,500,000 |
| Average capital (USD) | (4,000,000 + 4,400,000) / 2 = 4,200,000 | (8,000,000 + 9,000,000) / 2 = 8,500,000 | (3,000,000 + 3,500,000) / 2 = 3,250,000 |
| ROIC | 750,000 / 4,200,000 = 17.86% | 1,125,000 / 8,500,000 = 13.24% | 1,500,000 / 3,250,000 = 46.15% |
As a check, split each return into NOPAT margin multiplied by capital turnover:
ROIC = (NOPAT / Revenue) × (Revenue / Average invested capital)
For the manufacturer, 1,125,000 / 10,000,000 = 11.25% and 10,000,000 / 8,500,000 = 1.17647 times, rounded to five decimals. Multiplying the unrounded values reproduces 13.24%. Its lower return reflects the larger capital denominator as well as its earnings.
Suppose the manufacturer supplies goodwill of $2,000,000 at both opening and closing dates. Its average goodwill is therefore (2,000,000 + 2,000,000) / 2 = $2,000,000. Excluding that balance reduces average capital from $8,500,000 to $6,500,000.
With NOPAT unchanged, the alternative return becomes 1,125,000 / 6,500,000 = 17.31%. No additional profit was earned. The higher percentage answers a different capital question, so preserve both labels rather than replacing the original result.
Finance owns the definitions and reconciliation. Business leaders use the comparison to investigate pricing, asset utilization, acquisition economics and working-capital demands. For new spending, use return on incremental invested capital alongside the historical comparison.
Bring your operating-profit schedule, capital balances and supplied peer workbook to Covirage, which maps the columns. Its tools compute and check consistently defined returns; the external AI model explains differences with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for finance teams for the reporting context.
There is no universal good percentage. Start with peers that share the business's activities and capital requirements, measured consistently over comparable periods. Then assess the company's trend, accounting differences and capital hurdle rather than treating an industry average as a target.
Include it when assessing returns on the capital committed through acquisitions. An additional calculation excluding goodwill can describe operating capital differently, but label it separately and apply the same earnings adjustments and denominator convention to every peer.
It may be a median, a simple average or a ratio of aggregate operating profit to aggregate invested capital. Those methods answer different questions. Read the provider's methodology and reproduce its weighting before comparing your own business with the result.