What does it indicate when ROIC is greater than the Cost of Capital?

When Return on Invested Capital (ROIC) is greater than the Cost of Capital, it signifies that the company is generating more profit from its invested capital than is required to cover the costs of that capital. This situation indicates that management is effectively utilizing the resources at their disposal to create value for shareholders.

Specifically, when ROIC exceeds the Cost of Capital, it suggests that the investments made by the company are yielding returns that are above the minimum required rate of return expected by investors. This reflects positively on management's decisions regarding capital allocation, as they are making investments that enhance profitability and support sustainable growth. Such performance is often a key indicator of a company’s operational efficiency and effectiveness in pursuing its strategic objectives.

In contrast, when ROIC is lower than the Cost of Capital, it could mean resources are not being fully or wisely utilized, leading to inadequate returns on investments or unprofitable ventures. Therefore, the relationship between ROIC and the Cost of Capital is crucial for assessing financial performance and sustainability strategies in an organization.