Living Reference Work Entry

The Palgrave Encyclopedia of Strategic Management

pp 1-4

Date: Latest Version

Return on Invested Capital (ROIC)

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’.