What happens to ROIC when operating profits increase?

The correct choice is that ROIC, or Return on Invested Capital, increases when operating profits rise. This is based on the fundamental formula for ROIC, which is calculated as operating profit (or net operating profit after tax) divided by the invested capital.

When operating profits increase, the numerator of the ROIC formula grows while the invested capital typically remains relatively constant in the short term. This leads to a higher ratio overall. An increase in operating profits indicates that a company is generating more earnings from its capital, which is a sign of effective management and operational efficiency.

In contrast, if operating profits were to decrease, ROIC would likely decline, reflecting reduced profitability relative to the invested capital. If operating profits remain unchanged, the ROIC would stay the same. Fluctuation in ROIC would imply variability in profits or capital, but in the context of rising operating profits, this scenario does not apply. Thus, an increase in operating profits directly correlates to an increased ROIC, demonstrating the efficiency and profitability of the company's investments.