Quality Thesis

Financial metrics are the bedrock of smart decision-making for businesses, investors, and analysts alike. Among the many available indicators, three ratios stand out when it comes to assessing a company’s profitability and capital efficiency: Return on Invested Capital (ROIC), Return on Net Assets (RONA), and Return on Capital Employed (ROCE).

Each of these metrics offers a slightly different lens through which to view a company’s ability to generate returns. However, if you’ve ever tried to calculate them yourself, you’ve probably noticed: there is no single, universally accepted method. Different analysts, investors, and even companies might apply slight variations, leading to confusion.

In this article, we’ll break down what these metrics are, why the calculations vary, and — most importantly — why consistency in your methodology is far more critical than finding the “perfect” formula.

ROIC, RONA, ROCE — A Quick Refresher

Before diving into the nuances, here’s a quick summary of each metric:

• ROIC (Return on Invested Capital) measures the after-tax operating profit generated per dollar of invested capital (equity + debt). It’s widely used to assess whether a company is creating value above its cost of capital.
• RONA (Return on Net Assets) looks at net income relative to operational assets — typically fixed assets plus net working capital. It’s especially relevant for capital-intensive businesses.
• ROCE (Return on Capital Employed) assesses how well a company generates operating profits (EBIT) from all long-term sources of capital (equity + long-term debt). It’s a favorite for comparing companies with different capital structures.

The Real Challenge: Different Ways to Calculate

While the basic concepts are straightforward, when it comes to real-world calculations, differences arise. These usually stem from how you define two key components:

1. The asset base (what counts as “capital” or “net assets”)
2. The profit measure (net income, NOPAT, EBIT, etc.)

And here’s the important part: Everyone has a slightly different approach. For instance:

• Some exclude excess cash from the asset base, arguing it’s not really “employed” in the business.
• Others debate whether to include intangibles like goodwill — after all, goodwill doesn’t directly generate cash flow, but it does represent past investments.

As a result, you might see a company report a ROIC of 15% in one analysis and 18% in another, simply because of different assumptions.

Two Big Decisions You Need to Make

If you want to calculate ROIC, RONA, or ROCE properly — and, more importantly, compare companies consistently — you must decide upfront on two major issues:

1. Should Non-Operating Assets Like Excess Cash Be Included?

Excess cash isn’t needed for day-to-day operations, so many analysts prefer to subtract it from invested capital. This focuses the metric on the capital actively generating returns.

However, some argue that all assets (including cash) represent choices made by management, and therefore should be included.

🔹 Tip: If your goal is to measure operational capital efficiency, it’s often better to exclude excess cash.

2. How Should Intangible Assets Be Treated?

Goodwill and intangible assets (like brand value or patents) can be large line items — especially after acquisitions. You can either:

• Include intangibles: Reflects the full price paid for assets, including strategic value.
• Exclude intangibles: Focuses purely on tangible, operational assets.

Neither approach is wrong, but you must be consistent, especially when comparing across companies or across periods.

🔹 Tip: In asset-heavy industries (like manufacturing), many prefer to exclude goodwill; in tech or consumer brands, where intangibles are the business, including them might make more sense.

The Bottom Line: Consistency Trumps Precision

Ultimately, the most important thing is consistency.
Pick a methodology — make your choices about excess cash and intangibles — and stick to it for all your analyses. This way, you can compare apples to apples, even if your method differs slightly from someone else’s.

When communicating your results (whether in reports, presentations, or investment memos), it’s also good practice to briefly mention your assumptions — for example:
“ROIC calculated excluding excess cash and goodwill.”

This helps ensure clarity and avoids confusion when others review your work.

Final Thoughts

ROIC, RONA, and ROCE are powerful tools to understand how effectively a company is using its capital. But their real value comes from thoughtful, consistent application, not from chasing a “perfect” formula.

By being clear about your choices and maintaining consistency, you’ll be able to unlock deep insights into companies’ financial performance — and make better investment and strategic decisions.