← Business Metric: Financial (all topics)
Return on incremental capital
What it is
The return earned specifically on newly invested capital, rather than on the whole historic asset base. It is measured as the change in operating profit divided by the change in capital employed over a period
It reveals whether recent investment is as productive as the legacy business
Impact on industries
- The most forward-looking return measure - it shows whether growth is creating or destroying value at the margin
- A company reinvesting at high incremental returns compounds value; one reinvesting below its cost of capital shrinks it while growing
- Noisy over short periods, since new capacity takes time to reach full utilisation and the ratio understates until it does
- It is the metric that separates genuine compounding from growth funded by an eroding return profile