What it means
Most return ratios divide profit by assets as shown on the balance sheet, which are reduced each year by depreciation. As a machine ages, its book value falls, so the same profit looks like a better and better return even though nothing has improved.
ROGIC tries to solve this by adding accumulated depreciation back into the capital base. Gross invested capital therefore represents roughly what the business originally put into its operating assets, plus working capital.
Because the base does not shrink as equipment gets older, ROGIC is steadier from year to year. It allows fairer comparisons between a company with new assets and one with old assets.
The numerator is also adjusted. One common definition, popularised by the research firm New Constructs, uses gross NOPAT, which is after-tax operating profit with depreciation and amortisation added back.
Definitions differ between providers, so anyone using ROGIC should check exactly which version a source applies. For managers and investors, the ratio answers a simple question: how much operating cash-style profit does the business generate for each dollar ever put into it?
A ROGIC that consistently exceeds the company's cost of capital suggests the business earns its keep. A falling ROGIC suggests that new investments are earning less than past ones, which is an early warning that growth spending may not be paying off.
The nuance is that the measure is less common than ROCE or ROIC, and the data needed are not always published. It also cannot tell the difference between assets that are still productive and those that are worn out, so it should be used alongside other measures.
In practice
Real-world examples.
Example
An analyst compares two railway companies, one with a modern fleet and one with a fleet bought decades ago. Standard ratios favour the older company, but ROGIC shows both earn about the same on the capital originally invested, which gives a fairer basis for comparison.
Example
A private equity firm screens manufacturers using ROGIC because it wants a measure that does not reward businesses simply for owning old, heavily depreciated equipment. The shortlist that results tends to favour firms that earn well on what they actually invested.
Example
A chief financial officer tracks ROGIC across divisions to see which ones create the most operating profit per dollar of total capital invested, instead of per dollar of book value. The ranking helps decide where to direct next year's capital budget.
Formula
Calculation
ROGIC = Gross NOPAT / Average Gross Invested Capital
Gross NOPAT = (EBIT + Depreciation and Amortisation) x (1 - Tax Rate)
Gross Invested Capital = Net Working Capital + Net Fixed Assets + Accumulated Depreciation and Amortisation
Worked example: A company has EBIT of $1,300,000 and depreciation and amortisation of $300,000. The tax rate is 25%. Net working capital is $1,000,000, net fixed assets are $4,000,000 and accumulated depreciation is $3,000,000.
Gross NOPAT = ($1,300,000 + $300,000) x (1 - 0.25) = $1,600,000 x 0.75 = $1,200,000
Gross invested capital = $1,000,000 + $4,000,000 + $3,000,000 = $8,000,000
ROGIC = $1,200,000 / $8,000,000 = 0.15 = 15%
For comparison, a standard return on invested capital would use NOPAT of $1,300,000 x 0.75 = $975,000 over net capital of $1,000,000 + $4,000,000 = $5,000,000, which gives 19.5%. The higher figure is flattered by assets that have already been written down.Case study
Seen in the real world.
Fernhill Packaging is a fictional manufacturer with two plants. In this illustrative case, the older plant showed a return on net assets of 30%, and the newer plant showed 12%, so management planned to expand the older one and close the newer one.
A new finance analyst calculated ROGIC for both. The old plant's gross capital was almost three times its book value because most of its equipment had been depreciated, and its ROGIC was 11%, while the newer plant's ROGIC was 12%.
The board realised that the old plant's high return came from depreciation, not better performance, and that its equipment would soon need costly replacement. Closing the newer plant would have left the group dependent on machines near the end of their lives. They kept both plants and budgeted for an upgrade of the old one.
Watch out
Common mistakes.
- Assuming there is one universal formula. Providers differ in their adjustments, so check the definition.
- Comparing ROGIC with ROIC directly. ROGIC uses a larger capital base, so it is usually lower for the same company.
- Ignoring asset condition. A high gross capital base may include worn-out assets that need replacing.
Questions
People also ask.
Why add back accumulated depreciation?
It keeps the capital base from shrinking as assets age, which makes returns comparable over time and across firms.
How does ROGIC differ from ROCE?
ROCE uses book values of assets net of depreciation, while ROGIC uses the gross, undepreciated amount.
Who uses ROGIC?
Investment analysts and research firms use it to judge business quality, particularly in industries with large amounts of long-lived equipment. Corporate finance teams can also use it internally to compare plants of different ages.
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