ROIC — the Compounding Quality Gate

The definition that matters

Return on Invested Capital = operating profit after tax ÷ (debt + equity actually deployed in the business). It answers the only question that matters for compounding: "for every dollar this business ties up, how much profit comes back?" ROIC 20% means each reinvested dollar compounds at 20% — that is the engine of long-term returns.

The gate

Compare ROIC to the cost of capital (~8–10% for most firms): above it, growth CREATES value — every dollar reinvested is worth more than a dollar. Below it, growth DESTROYS value — the company would be kinder to shareholders by returning cash. A high-growth, low-ROIC company is a furnace for capital. This is why "growth" without ROIC context is meaningless.

The Buffett filter

Buffett's ideal: a business needing little capital that earns high returns on what it uses (see-saw candy, brand franchises). Watch ROIC TREND too: rising = moat strengthening; falling toward the cost of capital = the moat is a memory.

Sources

• Return on Invested CapitalInvestopedia
• Berkshire Hathaway Shareholder LettersWarren Buffett