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ROIC vs. WACC Analysis

For informational and educational purposes only • Not investment advice.

Apple

iPhone, services, devices

ROIC - WACC

89.3%
ROIC: 99.6%
WACC: 10.3%

Strong value creation

This model compares the company's Return on Invested Capital (ROIC) with its Weighted Average Cost of Capital (WACC) to determine whether it creates or destroys economic value.

ROIC Spread

Comparison of Return on Invested Capital, Weighted Average Cost of Capital, and the resulting economic value spread.

99.6%ROIC10.3%WACC89.3%Spread

Key Valuation Metrics

Equity Risk Premium
%
Range: 2–10%

Notes

• ROIC is above WACC, meaning the company earns more on invested capital than investors require.

What is ROIC vs. WACC Analysis?

ROIC vs. WACC Analysis measures whether a company creates or destroys economic value by comparing its Return on Invested Capital (ROIC) with its Weighted Average Cost of Capital (WACC).

ROIC measures the return generated from the capital invested in the operating business, while WACC represents the return required by shareholders and lenders. A positive ROIC Spread indicates value creation because the company earns more than its cost of capital, whereas a negative spread indicates value destruction.

This relationship is closely connected to the Economic Value Added (EVA) framework. Multiplying the ROIC Spread by Invested Capital produces Economic Profit, which measures the value created after accounting for the cost of the capital employed in the business.

Unlike the full EVA valuation model, ROIC vs. WACC Analysis does not forecast future Economic Profit or estimate Fair Value per Share. Instead, it evaluates the company's current ability to create economic value from its invested capital.


ROIC & WACC Formulas

ROIC Spread compares the Return on Invested Capital (ROIC) with the company's Weighted Average Cost of Capital (WACC) to evaluate whether the business is creating or destroying economic value.

Net Operating Profit After Tax (NOPAT)
NOPAT=EBIT×(1−T) \text{NOPAT} = \text{EBIT} \times (1-T)
Net Debt
Net Debt=Total Debt−Cash & Short-Term Investments \text{Net Debt} = \text{Total Debt} - \text{Cash \& Short-Term Investments}
Invested Capital
Invested Capital=Shareholders’ Equity+Net Debt \text{Invested Capital} = \text{Shareholders' Equity} + \text{Net Debt}
Return on Invested Capital (ROIC)
ROIC=NOPATInvested Capital \text{ROIC} = \frac{\text{NOPAT}} {\text{Invested Capital}}
Weighted Average Cost of Capital (WACC)
WACC=wErE+wDrD(1−T) \text{WACC} = w_Er_E + w_Dr_D(1-T)
ROIC Spread
ROIC Spread=ROIC−WACC \text{ROIC Spread} = \text{ROIC} - \text{WACC}
Economic Profit
Economic Profit=(ROIC−WACC)×Invested Capital \text{Economic Profit} = (\text{ROIC}-\text{WACC}) \times \text{Invested Capital}

How does ROIC vs. WACC Analysis work?

The ROIC vs. WACC analysis compares the return generated on invested capital with the return required by shareholders and lenders. It calculates ROIC and WACC, measures the difference between them, and converts that spread into an estimate of Economic Profit.

Calculate NOPAT & Invested Capital
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Calculate ROIC
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Estimate Cost of Equity & Debt
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Calculate WACC
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ROIC − WACC = ROIC Spread
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Economic Profit & Value Creation

Step 1 — Calculate Return on Invested Capital (ROIC)

ROIC = NOPAT / Invested Capital
NOPAT = EBIT × (1 − Tax Rate)
= $155.9B × (1 − 17.3%) = $128.9B

Net Debt = Total Debt − Cash
= $84.3B - $62.4B = $21.9B

Invested Capital = Shareholders' Equity + Net Debt
= $107.5B + $21.9B = $129.5B

ROIC = $128.9B / $129.5B = 99.6%

The model calculates NOPAT using trailing twelve-month (TTM) EBIT and TTM tax data. NOPAT is divided by Invested Capital to estimate how efficiently Apple generates after-tax operating profit from the capital employed in its business. Under the current assumptions, Apple's ROIC is 99.6%.

Step 2 — Calculate Weighted Average Cost of Capital (WACC)

WACC = Equity Weight × Cost of Equity + Debt Weight × After-Tax Cost of Debt
Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium
= 4.7% + 1.17 × 5.0% = 10.5%

Cost of Debt = Interest Expense / Total Debt
= $0.0B / $84.3B = 1.0%

WACC = (98.3% × 10.5%) + (1.7% × 1.0% × (1 − 17.3%)) = 10.3%

The model estimates the Cost of Equity using CAPM, with the Risk-Free Rate providing the baseline required return. The Risk-Free Rate is based on the U.S. 10-Year Treasury yield published by the Federal Reserve Board. The Cost of Debt is estimated using trailing twelve-month (TTM) Interest Expense and Total Debt. The Cost of Equity and After-Tax Cost of Debt are then weighted according to the company's capital structure. Under the current assumptions, Apple's WACC is 10.3%, representing the return required by shareholders and lenders.

Step 3 — Calculate ROIC Spread and Economic Profit

ROIC Spread = ROIC − WACC
= 99.6% − 10.3% = 89.3%

Economic Profit = ROIC Spread × Invested Capital
= 89.3% × $129.5B = $115.6B

The final step subtracts WACC from ROIC to determine whether Apple creates or destroys economic value. The resulting ROIC Spread is 89.3%, producing estimated Economic Profit of $115.6B.