{"id":17254,"date":"2021-07-09T05:50:15","date_gmt":"2021-07-09T05:50:15","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=17254"},"modified":"2026-03-02T10:06:23","modified_gmt":"2026-03-02T10:06:23","slug":"return-on-invested-capital-and-competitive-advantage","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/return-on-invested-capital-and-competitive-advantage\/","title":{"rendered":"Return on Invested Capital and Competitive Advantage"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Which return measure is most appropriate for comparing firms in different tax jurisdictions?\",\r\n    \"text\": \"Which of the following return measures is most likely to be used to evaluate companies operating in different tax jurisdictions?\\n\\nA. Return on capital employed.\\n\\nB. Return on invested capital.\\n\\nC. Net operating profit less adjusted taxes.\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is A. Return on capital employed (ROCE) is commonly used to compare firms across different tax jurisdictions because it typically relies on pre-tax measures, making it less affected by variations in tax structures. Return on invested capital and net operating profit measures generally incorporate tax adjustments.\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/7ttgH8I_8SE\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n<p><em><strong>Return on invested capital<\/strong><\/em> (ROIC) measures the profitability of the capital invested by the company\u2019s shareholders and debt holders.<\/p>\r\n<p>$$\\text{ROIC}=\\frac{\\text{Net operating profit less adjusted taxes (NOPLAT)}}{\\text{Invested capital}}$$<\/p>\r\n<p>NOPLAT is earnings before interest expense which is earnings available to equity holders and debt holders. The invested capital is calculated as operating assets less operating liabilities.<\/p>\r\n<p>ROIC is a better measure of profitability relative to return on equity because it is not affected by a company\u2019s degree of financial leverage. Sustainably high ROIC is a sign of competitive advantage. To increase ROIC, a company must either increase earnings, reduce invested capital, or both.<\/p>\r\n<p><em><strong>Return on capital employed<\/strong><\/em> (ROCE) is operating profit divided by capital employed (debt and equity capital). ROCE can be used to compare companies with different tax structures.<\/p>\r\n<p>$$\\text{ROCE}=\\frac{\\text{Operating profit}}{\\text{Capital employed (debt and equity capital)}}$$<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which of the following is the return <em>most likely<\/em> to be used to evaluate companies in different tax jurisdictions?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>Return on capital employed.<\/li>\r\n\t<li>Return on invested capital.<\/li>\r\n\t<li>Net operating profit less adjusted taxes.<\/li>\r\n<\/ol>\r\n<h4>Solution <\/h4>\r\n<p><strong>The correct answer is A.\u00a0<\/strong><\/p>\r\n<p>Return on capital employed is a profitability measure that is used to compare companies with different tax structures. It uses pre-tax measures to calculate return.<\/p>\r\n<p><strong>B is incorrect. <\/strong>Return on invested capital measures the profitability of capital invested by a company\u2019s shareholders and debt holders. The numerator in the return on capital invested is tax adjusted.<\/p>\r\n<p><strong>C is incorrect. <\/strong>Net operating profit less adjusted is a financial metric that calculates a firm\u2019s operating profits after adjusting for taxes.\u00a0<\/p>\r\n<\/blockquote>\r\n<p>Reading 22: Industry and Company Analysis<\/p>\r\n<p><em>LOS 22 (f) D<\/em><em>escribe the relationship between return on invested capital and competitive advantage.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"Return on invested capital (ROIC) measures the profitability of the capital invested by the company\u2019s shareholders and debt holders. $$\\text{ROIC}=\\frac{\\text{Net operating profit less adjusted taxes (NOPLAT)}}{\\text{Invested capital}}$$ NOPLAT is earnings before interest expense which is earnings available to equity holders...","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,401],"tags":[216,429,433],"class_list":["post-17254","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-equity-valuation","tag-cfa-level-2","tag-reading-26-industry-and-company-analysis","tag-return-on-invested-capital-and-competitive-advantage","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>ROIC &amp; Competitive Advantage | CFA Level 2<\/title>\n<meta name=\"description\" content=\"Learn the ROIC formula, invested capital calculations, and how ROIC signals competitive advantage in CFA Level 2 equity analysis.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, 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