Return on total capital

Return on total capital measures how much operating profit a company earns on all the money invested in it, from both lenders and shareholders.

The formula is:

Return on equity only looks at shareholders' money, so a company can lift it simply by borrowing more. Return on total capital counts debt and equity together, which makes it a fairer comparison between companies with very different amounts of debt.

It sits close to return on invested capital, which divides the same capital base into operating profit after taxes (NOPAT) rather than before them, so return on total capital usually reads higher for a company that pays tax. Some data providers apply the tax adjustment to return on total capital as well, at which point the two measures converge, so check which version a source uses. Whichever version you use, compare it with the company's cost of capital: a return comfortably above that cost means growth creates value, while a return below it means growth destroys value.