ROIC vs WACC - Return on capital vs Cost of capital

 A good Return on Invested Capital (ROIC) generally exceeds a company's Weighted Average Cost of Capital (WACC), meaning it generates more wealth than it costs to fund the business. As a rule of thumb, an ROIC above 10% is considered solid, while anything 15% or higher usually signals a strong competitive advantage. 

Understanding what makes a "good" ROIC comes down to a few key factors:

1. The Golden Rule: ROIC > WACC

The absolute number matters less than the spread between your ROIC and your cost of capital (WACC). 

• Value Creation: If your ROIC is 15% and your WACC is 8%, the business is highly efficient and creating value.
Value Destruction: If your ROIC is 5% and your funding costs are 7%, the business is destroying wealth.

2. Industry Norms

Capital requirements vary heavily by industry, altering the baseline for a good ROIC: [1, 2]

• Asset-Light Industries (e.g., Software, Consulting): These require little physical capital. Investors typically expect an ROIC of 20% to 30%+. [1, 2]
• Capital-Intensive Industries (e.g., Manufacturing, Utilities): These require heavy upfront investments in equipment and plants. A solid ROIC here is typically 7% to 12%. [1, 2]

3. Consistency Over Time

A single year of high ROIC doesn't reveal much. Look for companies that have sustained a strong ROIC over a 5 to 10-year period. A consistent or growing ROIC over time highlights strong management and durable business moats.