What is ROIC (or ROTIC), and why do serial acquirers obsess over it?

What is ROIC, and what is ROTIC?

ROIC divides profit by the capital invested to earn it. The hard part is the definition. Three public serial acquirers use three different ones:

• Constellation Software: the glossary in its president's letters defines ROIC as the ratio of adjusted net income to average invested capital (2015 letter). Profit here is after interest and tax, and invested capital is a running estimate of the money common shareholders have put in, so debt sits outside it.
• Judges Scientific: ROTIC compares attributable EBITA, excluding central costs and adjusting items, with the amounts invested in plant, net current assets excluding cash, and intangibles and goodwill as recognised at the initial acquisition date, plus acquisition costs and later increases in consideration (Judges FY2025 results). Profit here is before interest and tax.
• Lifco: return on capital employed excluding goodwill and intangibles, with a target of more than 50% and an actual 132% for 2025 (128% in 2024) (Lifco Annual Report 2025).

Addtech reports return on capital employed of 22% and return on equity of 29% for the year to 31 March 2026 (Addtech key financial indicators).

Why do serial acquirers obsess over it?

Because a holding company has only a few ways to use cash: buy a business, pay a dividend, repay debt or buy back shares. ROIC is the scoreboard for the first choice. If new acquisitions earn less than the existing base, the average falls even while profit rises.

Constellation shows this in its own numbers. Its ROIC ran from 21% in 2006 to 38% in 2015, then fell to 31% in 2016 and 29% in 2017. The 2016 letter ties part of the fall to carrying excess cash and to larger acquisitions that earned lower returns, and the 2017 letter says to expect ROIC to keep dropping (2015 letter, 2016 letter, 2017 letter). The 2017 letter also reports ROIC plus organic net revenue growth, which stayed relatively flat at 33% that year.

Berkshire frames the same idea as a test: retention should, over time, deliver at least $1 of market value for each $1 retained (Berkshire Owner's Manual).

How can the same business show 16% or 100%?

The answer is goodwill. The difference between a pre-goodwill and a post-goodwill return is large for acquirers, because they pay for earnings, not for equipment.

Worked example (all inputs are assumptions). A holding company buys a business for $5.0M cash. The target earns $0.8M of EBITA. On the balance sheet, $0.8M is equipment and working capital and $4.2M is goodwill and intangibles.

• Including goodwill: $0.8M / $5.0M = 16.0%.
• Excluding goodwill: $0.8M / $0.8M = 100%.
• After three years, EBITA grows to $1.0M on the same capital. Including goodwill: $1.0M / $5.0M = 20.0%.

Neither number is wrong. The 100% figure says the operating business is capital-light. The 16% figure says what you paid. Lifco's 132% and Judges' 17.8% are not comparable for this reason.

Which version should a small holding company track?

My view is to track the version that includes goodwill, because that is the cash you actually put in. Rule of thumb, not a disclosed standard: measure it on every acquisition and for the group, and use the same definition every year.

• Use pre-tax EBITA if you compare to a purchase multiple, and after-tax profit if you compare to a cost of equity.
• Count the full price, including earn-outs and deal costs. Judges adds acquisition costs and later increases in consideration to its capital base.
• Exclude surplus cash from capital, as Judges excludes cash from net current assets.
• Watch the trend by cohort. A new deal shows its true return only after the first full year.

The price you pay sets the starting ROIC. See what multiples serial acquirers pay. The hurdle you set against it is in the hurdle rate article.

Where these numbers come from: Constellation's definition and 2006 to 2015 values are in its 2015 President's Letter; 2016 and 2017 figures are from its 2016 and 2017 letters. Judges' definition and 17.8% are from its FY2025 results announcement. Lifco's target and 132% are from its Annual and Sustainability Report 2025. Addtech's ratios are from its key financial indicators. Berkshire's test is from its Owner's Manual. The $5.0M example is the site's assumption.

Related questions

What is the difference between ROIC and ROE?

ROE divides net profit by shareholders' equity, so debt raises it. ROIC in its usual form divides profit by all invested capital, debt and equity together, although Constellation's version uses shareholders' capital only. Addtech's 29% ROE and 22% ROCE for the year to March 2026 show the gap.

Is a high ROIC always good?

A high figure that excludes goodwill can hide a high purchase price, as in the example above. Check which definition is used and what the acquisitions cost.

Does ROIC need audited numbers?

It needs reliable numbers. For an acquirer that means a consistent profit definition and a record of what each deal cost. Audited statements make both easier to trust.

What comes next

The price paid sets the starting return, so look next at disclosed deal prices: What multiples serial acquirers pay.

Related articles

• What hurdle rate should a serial acquirer use?
• What multiple do serial acquirers really pay for small companies?
• What is the "Constellation Software model," and can it work outside software?
• What is a serial acquirer, and how is it different from a roll-up?
• What is the difference between SDE and EBITDA?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.