Ending Return on Invested Capital (ROIC)

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Return on invested capital (ROIC) is not only the most intuitive measure of corporate performance, but it is also the best. It measures how much profit a company generates for every dollar invested in the company. It is the true measure of a company’s cash on cash returns.

Ending ROIC is a variation on the standard ROIC calculation and is calculated (see Figure 1) by dividing net operating profit after tax (NOPAT) by ending invested capital. Ending invested capital is measured at the end of a given quarterly, annual or trailing twelve months (TTM) period. Using ending invested capital provides unique insights, but it can also result in a potentially myopic view of a firm’s profitability at a certain point in time. For example, an acquisition made at the end of a fiscal year would dramatically increase ending invested capital while the NOPAT from the acquisition might barely affect NOPAT for the period.

The formulas for ROIC are easy. The hard part is finding all the data, especially from the footnotes and MD&A, required to get NOPAT and invested capital right. When we calculate ROIC, we make numerous adjustments to close accounting loopholes and ensure apples-to-apples comparability across thousands of companies.

Figure 1: How to Calculate Ending ROIC

 NOPAT/Ending Invested Capital

 Or

NOPAT/Revenue * Revenue/Ending Invested Capital

Sources: New Constructs, LLC and company filings

Our Robo-Analyst technology[1] allows us to perform the diligence needed to calculate an accurate ROIC and comparable metrics, such as ending ROIC, return on gross invested capital (ROGIC), and GAAP-based ROIC.

There’s no reason for investors not to take advantage of best-in-class calculations of a firm’s profitability, e.g. ROIC. Figure 2 shows the companies with the highest/lowest ROIC over the trailing twelve months as of May 5, 2021.

Figure 2: S&P 500 Companies with Highest/Lowest Ending ROIC: TTM as of May 5, 2021

Sources:  New Constructs, LLC and company filings.

As shown in Figure 2, the S&P 500 companies with the highest ending ROIC are all Technology firms. However, a high ending ROIC doesn’t necessarily mean a company is a good investment. While these firms are very profitable, high valuations leave all but Apple Inc. (AAPL) with Neutral-or-worse ratings.

On the other hand, Alaska Air Group (ALK), American Airlines (AAL), United Airlines (UAL), and Southwest Airlines (LUV) are four of the least profitable companies under coverage over the TTM. The makeup of least profitable firms may not come as a surprise, given the challenges the entire airline industry has faced over the past 12-16 months. Event promoter, Live Nation Entertainment (LYV), which also earns one of the lowest ending ROICs in the S&P 500, also faced challenges similar to those in the travel industry.

Our models and calculations are 100% transparent because we want our clients to know how much work we do to ensure we give them the best earnings quality and valuation models in the business.

[1] HBS features our technology, the only technology that brings material footnotes data to investors, in the case study: “New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.”

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