Enterprise Value to Invested Capital (EV/Invested Capital)

EV/Invested Capital measures how much the market pays per dollar of capital deployed in the business. It is the enterprise-level equivalent of price-to-book and pairs naturally with ROIC, just as P/B pairs with ROE.

A company with high ROIC deserves a high EV/IC multiple because each dollar of capital generates above-average returns. A company with ROIC below its cost of capital should trade at EV/IC below 1.0, since its capital destroys value.

This framework - pairing EV/IC with ROIC - is used extensively by institutional investors and the McKinsey Valuation framework to assess whether a stock's premium (or discount) is justified by its economic performance.

EV/IC should be evaluated relative to ROIC. A stock at 3x EV/IC with 25% ROIC may be cheaper than one at 1.5x EV/IC with 6% ROIC. The relationship between the two reveals whether the market is over- or under-pricing the company's returns.

EV/IC below 1.0 means the enterprise is valued at less than the capital invested - the market believes the company destroys value. This can signal deep distress or a deep-value opportunity if returns are poised to improve.

Plotting EV/IC against ROIC for a universe of stocks creates a "value map" where stocks above the regression line are relatively expensive and those below are relatively cheap for their quality level.

Capital-light businesses (software, services) tend to show very high EV/IC ratios (5-15x) because they generate returns on relatively little invested capital.

Capital-heavy industries (utilities, telecoms, manufacturing) show lower EV/IC ratios (1-3x), reflecting the large asset bases required to generate returns.

The EV/IC vs ROIC framework is most useful for comparing companies within the same sector, where capital intensity is similar.