Incremental returns
What it measures¶
NOPAT is net operating profit after tax — operating profit minus the tax on it. Reinvestment is what the company spent to grow: capital expenditure plus the increase in working capital (current assets minus current liabilities), minus depreciation and amortisation.
The incremental return, or RONIC (return on new invested capital), asks what the money reinvested over the last three years earned: the rise in NOPAT over those three years divided by the reinvestment of those years. The check compares it with WACC, the weighted average cost of capital — the return lenders and owners require — taken from the sector benchmark, and asks: did the new capital earn at least its cost?
Why it is on the page¶
The return a company earned on its old capital says little about whether its newest spending is paying off. The textbook by Tim Koller and colleagues at McKinsey makes this the test of whether management's reinvestment creates value: new capital that earns less than it costs makes the owners poorer, however fast the company grows.
Thresholds, their source and the population they were fitted on¶
| Result | When |
|---|---|
| ✓ passed | RONIC over three years is at least the sector's cost of capital |
| ✕ failed | it is below |
| ○ not evaluable | no sector cost of capital is known, or an input of NOPAT or reinvestment is not stored |
| ○ not applicable | there was no net reinvestment over the three years |
- Source: Koller, Goedhart and Wessels, Valuation (McKinsey & Company); the sector cost of capital from Aswath Damodaran's January tables.
- Fitted on: no statistical sample — a principle of corporate finance applied with published sector costs.
- Evidence grade: practitioner convention.
- Basis: absolute.
A worked example¶
On 25 October 2026 no sector benchmark was stored, so for Honeywell International the check read not evaluable — the sector WACC (no sector benchmark). Apple's depreciation exceeded its spending on growth over the three years, so for Apple the check was not applicable — no net reinvestment over three years.
An illustration, not a stored figure: a company whose NOPAT rose from 800 to 1,000 million while it reinvested 1,600 million over three years earned an incremental return of 200 ÷ 1,600 = 12.5%. Against a sector cost of capital of 9% it would pass.
What “No verdict” means here¶
The check is not evaluable while no sector benchmark gives a cost of capital, or when an input is missing; it is not applicable when nothing was reinvested, net, over the three years. In each case the reason is named and the check leaves the area's count.
What the verdict is and is not¶
A pass says the profit added over three years was at least the cost of the capital added. Investments often take longer than three years to pay off, so a failure can be early rather than final. It is not a forecast and not an instruction to trade the shares. See also RONIC on the Fundamentals page.