ROIC vs WACC — the value-creation spread

does growth create or destroy value? · Valuation — what a company is actually worth

ROIC (return on invested capital) is how many cents of profit a company squeezes from each dollar of capital it uses. WACC (weighted average cost of capital) is what that capital costs — the return investors demand for the risk. The gap between them is the whole game.

If ROIC is above WACC, every dollar the company reinvests creates value — growth is genuinely good. If ROIC is below WACC, growth actually destroys value (spending $1 to create 90 cents), and a fast-growing company can be running to stand still. The app shows this as a signed number in points, and uses the same cost-of-capital rate the DCF discounts at, so the two agree.

value spread = ROIC − WACC        (in percentage points)
ROIC = operating profit after tax ÷ invested capital
WACC = blended after-tax cost of the company’s debt + equity

ROIC

— return on invested capital — profit earned per dollar of capital used

WACC

— weighted average cost of capital — what that capital costs the company

spread

— ROIC minus WACC; positive means growth builds value, negative destroys it

• The Balance — return on invested capital (ROIC) ↗
• The Balance — weighted average cost of capital (WACC) ↗