Value creation
What it measures¶
ROIC — return on invested capital — is operating profit after tax divided by the money invested in the business: the debt and owners' equity it uses, less spare cash. WACC — the weighted average cost of capital — is the yearly return that lenders and owners together require for providing that money, each weighted by how much they provide.
This check asks: is ROIC at least WACC? The difference, ROIC minus WACC, is called the spread. The cost of capital used is the sector's, from the sector benchmark, and it is shown beside the figure.
Why it is on the page¶
A business creates value for its owners only when it earns more on its capital than that capital costs. One that earns less loses value even while it grows — the faster it grows, the more it loses. This is the central idea of the valuation textbook by Tim Koller and colleagues at McKinsey, and the reason the band treats a high return on its own as incomplete.
Thresholds, their source and the population they were fitted on¶
| Result | When |
|---|---|
| ✓ passed | ROIC is at least the sector's cost of capital (spread 0 or more) |
| ✕ failed | ROIC is below it |
| ○ not evaluable | no sector benchmark is stored, so no cost of capital is known; or invested capital cannot be formed |
The company's own five-year median ROIC is shown beside the verdict as a second reading.
- Source: Koller, Goedhart and Wessels, Valuation (McKinsey & Company); the sector cost of capital from Aswath Damodaran's January tables.
- Fitted on: no fitted sample — a principle of corporate finance applied with published sector costs.
- Evidence grade: practitioner convention.
- Basis: sector band.
A worked example¶
Honeywell International, fiscal year 2025: ROIC was 22.0%, against its own five-year median of 22.5%. No sector benchmark was stored on 25 October 2026, so no sector cost of capital was known and the check read not evaluable — no sector benchmark.
An illustration, not a stored figure: with a sector cost of capital of 8%, a 22.0% ROIC is a spread of +14 percentage points and would pass.
What “No verdict” means here¶
The check is not evaluable when the sector benchmark is missing — the cost of capital comes from it — or when the debt and equity needed for invested capital are not stored, and the missing input is named. It then leaves the area's count. The product never fills in a cost of capital it does not have.
What the verdict is and is not¶
A pass says the latest year's return beat a published cost of capital for the sector. It does not say the return will last — high returns tend to fall back towards the average over the years — and a company's own cost of capital can differ from its sector's. It is not an instruction to trade the shares. See also ROIC against WACC on the Fundamentals page.