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Incremental return on invested capital is an extension of return on invested capital (ROIC). It measures the change in after-tax profit (NOPAT) over the change in invested capital from the prior year. In other words, incremental ROIC measures the new profits generated on new invested capital.

We’ve previously demonstrated that ROIC is the primary driver of stock prices. Incremental ROIC provides an indicator of the future direction of changes in ROIC. Since the market assigns value to companies that produce the most cash per capital invested, knowing which companies are deploying new invested capital most effectively can be key in any investors decision-making process.

The formula (see Figure 1) for calculating incremental ROIC is easy. The hard part is finding all the data, especially from the footnotes and MD&A, required to get the changes in NOPAT and invested capital right. When we calculate incremental ROIC, we make numerous adjustments to close accounting loopholes and ensure apples-to-apples comparability across thousands of companies.

Figure 1: How To Calculate Incremental ROIC

Sources: New Constructs, LLC and company filings

We make it easy for the average investor to leverage the benefits of a high quality ROIC model. As our research continues to proliferate, it gets harder for investors and executives to overlook its merits.

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