What Is Return on Capital?

Rate of return: The ratio of the interest paid by a bond in installments to the current market price of the bond.

Return on capital

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Rate of return: The ratio of the interest paid by a bond in installments to the current market price of the bond.

However, in the short term,

Return on capital =

Return on capital is often used to visually assess a company's value creation capabilities. A (relatively) high ROIC value is often seen as strong evidence of a company's robustness or good management. However, it must be noted that high returns on capital may also be a sign of poor management, such as over-emphasis

As an accounting assessment method, ROIC may have the following hidden dangers:

Manipulated by managers

Affected by the accounting system and changes in the accounting system;

Affected by inflation and exchange rate changes.

What is certain is that if a company's operating income is lower than the cost of capital, then it is usually impossible to create value unless its ROIC exceeds the cost of capital (WACC [Weighted Average Cost of Capital]).