Return on invested capital (ROIC) is generally considered a more rigorous profitability measure than return on equity (ROE) for comparing two companies with different capital structures because ROIC:
- A.Divides return by total invested capital (debt plus equity), removing the effect of leverage on the ratioCorrect. ROIC's denominator captures all capital employed, so it is not distorted by how leveraged the company is.
- B.Ignores debt entirely and measures only equity returnsWrong. This is the opposite of what ROIC does — its denominator explicitly includes debt.
- C.Uses pretax rather than after-tax profitWrong. ROIC conventionally uses after-tax operating profit (NOPAT), not pretax profit.
- D.Is always numerically higher than ROEWrong. ROIC is not always higher than ROE; the relationship depends on the company's leverage and returns.
Why: ROIC divides after-tax operating profit by total invested capital (debt plus equity), so it measures how efficiently a company generates returns on all the capital it employs, independent of how that capital is split between debt and equity. ROE, by contrast, can be inflated by leverage alone.