Finding the return on additional invested capital

Return on additional invested capital (ROIIC) is an extension of return on investment capital (ROIC), which itself is an extension of return on investment (ROI). While ROI measures a company’s profitability by dividing income by equity plus debt, ROIC tells investors how efficiently that profitability is achieved per dollar of a company’s capital. This ratio is expressed as a percentage.

ROIIC narrows the focus even further and shows how profitable each additional unit of capital investment can be. It is used similarly to the incremental productivity ratio of capital.

A company uses its ROIIC to express the relationship between its capital investments and the rate of return on those investments.

How is ROIIC calculated?

According to the Securities and Exchange Commission (SEC), ROIIC is calculated by dividing a company’s constant-rate incremental operating income (plus depreciation and amortization) by its constant-rate weighted average adjusted investment capital. Note that the constant rate excludes the impact of foreign currency translation.

In the denominator of the ROIIC equation, weights must be applied to each quarter of the time period being evaluated, which is typically one or three years. For example, annual ROIIC should use a different exponent for each of the four quarters to adjust for differences in levels of investment activity. If more cash investments were made in the third quarter than in the fourth, the weights should reflect this.

The weighted results are then aggregated to produce a one-year adjusted monetary measure. This should give a more realistic idea of ​​how investments affect returns than a simple annual average. ROIIC can then be compared to the company’s weighted average cost of capital (WACC) to determine whether the new project should be pursued.