IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family-owned businesses. The following blog article has been provided by Rob Torres. Mr. Torres is a business performance advisor with Insperity (https://www.insperity.com/):
Why Small and Medium Business Owners Should Understand and Use ROIC
Running a small or medium-sized business often means wearing many hats—sales, operations, HR, finance, and strategy. With so many responsibilities, it’s easy to get buried in day-to-day tasks and focus only on basic financial metrics like sales, gross margin, or net income. While those numbers are important, they don’t always tell you whether your business is creating real value.
That’s where Return on Invested Capital (ROIC) comes in.
ROIC is one of the most powerful tools a business owner can use to measure performance, guide decision-making, and ultimately build long-term value. While the concept is often discussed in big corporations or investment firms, it’s just as relevant—if not more—for smaller businesses that need to use capital wisely.
What Is ROIC?
In simple terms, ROIC measures how effectively your business turns invested money into profit.
The formula looks like this:
ROIC = Net Operating Profit After Tax (NOPAT) ÷ Invested Capital
NOPAT is essentially the profit your business generates from operations, after accounting for taxes but before interest.
Invested Capital includes the money invested in the business that’s used to run day-to-day
operations: equity from owners, debt from lenders, and retained earnings reinvested into the company.
Think of ROIC as the percentage return your business generates on every dollar invested.
Why ROIC Matters for SMBs
- It Tells You if You’re Creating or Destroying Value
Earning profit doesn’t automatically mean your business is creating value. For example, you might be earning 5% on capital, but if your cost of capital (what you pay in interest or the return your investors expect) is 8%, you’re actually losing value.
ROIC compares your returns to your cost of capital. If ROIC is consistently higher, you’re creating wealth. If it’s lower, you may be working hard but not building long-term value.
- It Guides Better Capital Allocation
Small business owners often reinvest profits into equipment, staff, or new locations without measuring how well those investments pay off. ROIC helps you evaluate whether those investments are truly generating strong returns.
Should you expand into a new market?
Is that new piece of equipment worth the financing cost?
Are your retained earnings better spent paying down debt or funding growth?
ROIC gives you a framework for answering these questions objectively.
- It’s a More Complete Picture than Profit Alone
A business can post strong sales growth or even good net income but still deliver poor ROIC if it ties up too much money in working capital or fixed assets. ROIC forces you to look at both profitability and efficiency in how you use resources.
In short, it’s not just about “how much” you make, but how well you use what you have.
- It Helps You Compare Against Alternatives
As a business owner, your capital has opportunity costs. You could invest in your company, put money into real estate, or even buy into the stock market. ROIC gives you a way to compare your business against other options. If your business can’t generate a higher return than relatively safe investments, it’s worth asking why.
How to Start Using ROIC
You don’t need to be a Wall Street analyst to calculate and apply ROIC. Here’s how to get started:
- Calculate NOPAT
Start with operating profit (EBIT).
Subtract taxes at your effective tax rate.
- Determine Invested Capital
Add up debt and equity used in the business.
Subtract excess cash not needed for operations.
- Run the Math
Divide NOPAT by invested capital to get your ROIC percentage.
- Compare to Your Cost of Capital
For debt: look at your average interest rate.
For equity: think about the minimum return you’d expect for your risk (many use 8–12% as a benchmark).
- Track Over Time
Measure ROIC quarterly or annually. The trend matters more than a single number.
A Practical Example
Let’s say your business has:
Operating Profit (EBIT): $500,000
Taxes: $100,000
NOPAT: $400,000
Your invested capital is $2,500,000 (including loans and owner equity).
ROIC = $400,000 ÷ $2,500,000 = 16%
If your cost of capital is around 10%, you’re generating significant value. If instead your ROIC came out at 6%, it would be a red flag that capital is not being put to its best use.
Key Takeaways for Business Owners
ROIC measures efficiency and profitability together. It’s a clearer signal of long-term value than sales or net income alone.
High ROIC means more financial flexibility. Businesses with strong ROIC can reinvest, weather downturns, and attract financing more easily.
Tracking ROIC encourages discipline. It forces you to prioritize projects, cut waste, and deploy capital in ways that truly drive growth.
Final Thoughts
Understanding ROIC isn’t just for investors or CFOs—it’s one of the smartest tools a small or medium business owner can use. By keeping an eye on ROIC, you’ll make sharper decisions, allocate resources better, and ensure your business is not just profitable today, but creating real wealth for the long term.
If you’re not already tracking ROIC, start now. Even a simple calculation will give you new insight into how your business is performing. Over time, it can become one of your most valuable guides in building a stronger, more resilient company.
Rob Torres is a Business Performance Advisor with Insperity, a market leading company in outsourced HR services. If you have questions about the content of this article or would like to obtain information related to the services Insperity offers its clients, Mr. Torres would welcome communication at (503) 880-3485 or rob.torres@insperity.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.