Return on invested capital

Over the last few years, the transformation of Pearson has significantly increased the capital invested in the business (in the form of goodwill associated with the acquisitions necessary to build our market-leading businesses) and required substantial cash investment to integrate those acquisitions and to deliver an increasing proportion of our publishing and services online. With that transformation now largely complete, we are in a strong position to improve, each year, our return on invested capital.

We define ROIC as operating profit less cash tax as a percentage of our net operating assets plus total goodwill (that is, before goodwill amortisation). In 2002, our ROIC was 6%, up from 4.6% in 2001. Our cost of capital is a little lower than 8%. Our goal is to generate returns on invested capital above the cost of our capital as soon as possible.

Going forward, we have two main levers to improve returns: increasing operating profit and reducing the level of operating assets. How quickly we can generate returns above our cost of capital will be dependent on a number of factors such as the business advertising environment.