ROIC vs. ROA: What's the Difference

ROIC vs. ROA: What's the Difference

When it comes to evaluating the performance of a company, there are a few key metrics that you need to know. Two of these metrics are ROIC and ROA. In this blog post, we will explain the difference between these two metrics and show you how to calculate them. We will also discuss why these metrics are important for stock investors to understand.

What is ROIC?

ROIC stands for Return on Invested Capital, and it is a measure of the amount of earnings that a company generates from its invested capital. This metric measures how profitable a company is when taking into account its cost of capital. To calculate ROIC, you must divide the net income by the total invested capital.

This metric is very helpful for investors to understand, as it allows them to measure the profitability and efficiency of a company. A higher ROIC indicates that the company is able to generate more earnings from its investments, while a lower ROIC indicates that the company may not be using its invested capital efficiently.

What is ROA?

ROA stands for Return on Assets, and it is a measure of the amount of earnings that a company generates from its total assets. This metric shows how profitable a company is at generating income from its total assets, such as cash, land, buildings, etc. To calculate ROA, you must divide the net income by the total assets.

This metric is also important for investors to understand, as it allows them to measure a company's profitability relative to its total assets. A higher ROA indicates that the company is able to generate more earnings from its assets, while a lower ROA indicates that the company may not be using its assets efficiently.

ROIC calculation

To calculate ROIC, you must divide the net income by the total invested capital. The formula for this calculation is:

ROIC = Net Operating Profit After Tax / Total Invested Capital

For example, let's assume that a company has a net operating profit after tax of $20 million and total invested capital of $100 million. Using this information, we can calculate the ROIC as follows:

ROIC = Net Operating Profit After Tax / Total Invested Capital

= $20M / $100M

= 0.2 or 20%

When analyzing stocks, the net operating profit after tax or NOPAT can also be calculated by taking the company's EBIT * (1- tax rate).

ROA calculation

To calculate ROA, you must divide the net income by the total assets. The formula for this calculation is:

ROA = Net Income / Total Assets

You can find the net income in the company's income statement and the total assets on the balance sheet.

For example, let's assume that a company has a net income of $20 million and total assets of $100 million. Using this information, we can calculate the ROA as follows:

ROA = Net Income / Total Assets

= $20M / $100M

= 0.2 or 20%

Difference between ROIC vs ROA

The main difference between ROIC and ROA is that ROIC takes into account the cost of capital while ROA does not. The cost of capital is the amount of money the company has to pay for its investments.

This means that with a higher ROIC, the company is able to generate more earnings from its investments, while a lower ROIC indicates that the company may not be using its invested capital efficiently. With a high ROA, the company can generate more earnings from its assets, while a lower ROA indicates that the company may not be using its assets efficiently.

An important distinction to make is that assets refer to any item that has value. In contrast, investments refers to capital investments, such as money invested in stocks, bonds, and other securities.

Example of ROA and ROIC calculations

In 2022 Apple Inc. reported total assets of $352.755 billion, net income of $99.803 billion, net operating profit after tax of $100.3 billion, and $191.4 billion in total invested capital.

ROA = Net Income / Total Assets

= $99.803B / $352.755B

= 0.2829 or 28.29%

ROIC = Net Operating Profit After Tax / Total Invested Capital

= $100.3B / $191.4B

= 0.524 or 52.4%

From the above calculations, we can see that Apple had a ROA of 15%, which means it could generate profits of 15 cents per dollar of assets. In addition, the company also had an ROIC of 15%, which means it was able to generate profits of 15 cents per dollar of invested capital.

Automatic ROIC & ROA calculation for stocks

Instead of calculating these metrics manually for every company you analyze, you can use a spreadsheet plugin like Wisesheets. Using Wisehseets, you can get these metrics along with hundreds of others instantly like this:

roic and roa in excel

This makes it easier for you to compare stocks at scale in your spreadsheet and find attractive investment opportunities faster.

Get your free Wisesheets trial here.

Which metric is best?

Both ROIC and ROA are important metrics to look at when analyzing stocks. However, ROIC is generally considered to be the better metric as it takes into account the cost of capital, which roa does not. Therefore roic is a better measure of a company's profitability relative to its investments rather than just its assets.

As an investor, it's important to understand the nuances of ROIC and ROA. Evaluating a stock using ROIC and ROA can help you determine whether the company is using its assets or investments efficiently and if it could potentially be a good investment opportunity.

Good luck with your investing!

Guillermo Valles
 | Website

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing and facilitating over a billion dollars in commercial real estate deals.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies.

That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

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