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Return on Invested Capital (ROIC)

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The Palgrave Encyclopedia of Strategic Management

Abstract

Return on invested capital (ROIC) is a financial measure of the profitability of a firm or business unit. If it is greater than the business’s cost of capital, then reinvestment of earnings increases shareholder value. The ROIC also determines a maximum self-sustaining growth rate for the business in the absence of outside funding. Finally, for businesses engaged in Schumpeterian competition, innovators with an ROIC advantage can drive out their predecessors by making them unprofitable. In this fashion, relative ROIC determines an innovation’s potential for ‘creative destruction’.

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Author information

Authors and Affiliations

  1. Harvard Business School, Baker Library 355, Boston, MA, 02163, USA

    Carliss Y. Baldwin

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  1. Carliss Y. Baldwin
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Correspondence to Carliss Y. Baldwin .

Editor information

Editors and Affiliations

  1. Stanford University , Stanford, California, USA

    Mie Augier

  2. Tusher Ctr Intellectual Capital, University of California Tusher Ctr Intellectual Capital, Berkeley, California, USA

    David J. Teece

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Baldwin, C.Y. (2016). Return on Invested Capital (ROIC). In: Augier, M., Teece, D. (eds) The Palgrave Encyclopedia of Strategic Management. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-94848-2_678-1

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  • DOI: https://doi.org/10.1057/978-1-349-94848-2_678-1

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  • Publisher Name: Palgrave Macmillan, London

  • Online ISBN: 978-1-349-94848-2

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