Challenging the Math Behind ROIC
Why the denominator in your favorite investing equation might be wrong.
Every investor knows the formula:
ROIC = NOPAT / Invested Capital
The numerator — NOPAT — is usually straightforward. The denominator, invested capital, is anything but.
That’s where this publication begins.
We’ll challenge the traditional math behind ROIC and explore how modern investors are rethinking what truly goes into and comes out of a business. The best investors — Buffett, Munger, and others — have always viewed this as an art, not a science. So why should one static formula explain all businesses perfectly?
Traditionally, invested capital is defined as equity + debt – cash. That works well for manufacturing companies or asset-heavy businesses. But as the world shifts toward software, AI, and asset light firms, this equation starts to break down. What does “invested capital” really mean for a business whose biggest investments don't show up on the balance sheet?
There are, broadly, two schools of thought on traditional invested capital. I first came across the other approach in Joel Greenblatt’s The Little Book That Beats the Market, where he defines invested capital as: net fixed assets + net working capital.
At first glance, that sounds entirely different. Yet for many companies, both calculations arrive at similar answers.
The real difference—and the focus of this publication—comes when we build our own version of invested capital. For some businesses, that means reclassifying what the income statement calls expenses into what they really are—investments in future value.
We’ll explore the art behind returns on invested capital to discover how the money going into a business translates (or fails to translate) into returns. We’ll dig into companies from every corner of the market: giants like Apple, Nvidia, and TSMC; maturing growth names like Chipotle and Netflix; and emerging leaders like Celsius, On Footwear, Rocket Lab, and Five Below.
Our goal is simple: to uncover how value is truly created, sustained, and sometimes destroyed.
Join us as we study how the best investors use valuation to play a different game entirely.
