Return On Capital (ROC)
Definition - What does Return On Capital (ROC) mean?
Return on capital (ROC) is a financial ratio used by sophisticated corporate acquirers in assessing the attractiveness of an investment in an acquisition target. The book definition of the ratio is net operating income after-tax (NOPAT) divided by the book value of invested capital.
A company creates value when the return on capital is greater than the weighted average cost of capital (WACC). When the opposite is true, value is being eroded.
Divestopedia explains Return On Capital (ROC)
The expected return on capital for an investor is different for the type of capital being deployed and also the estimated risk of the specific investment. In general, investors look for the following rates of return on the different types of capital uses:
- Senior debt and asset backed lending: 3%–9%;
- Mezzanine or subordinated debt: 9%–23%; and
- Equity: 23%+