Incremental Return On Invested Capital

Metrics are only as good as the data that drive them. The best fundamental data in the world drives our metrics. Here’s proof from some of the most respected public & private institutions in the world.

Incremental return on invested capital is an extension of return on invested capital (ROIC). It measures the change in after-tax profit (NOPAT) over the change in invested capital from the prior year. In other words, incremental ROIC measures the new profits generated on new invested capital.

We’ve previously demonstrated that ROIC is the primary driver of stock prices. Incremental ROIC provides an indicator of the future direction of changes in ROIC. Since the market assigns value to companies that produce the most cash per capital invested, knowing which companies are deploying new invested capital most effectively can be key in any investors decision-making process.

The formula (see Figure 1) for calculating incremental ROIC is easy. The hard part is finding all the data, especially from the footnotes and MD&A, required to get the changes in NOPAT and invested capital right. When we calculate incremental ROIC, we make numerous adjustments to close accounting loopholes and ensure apples-to-apples comparability across thousands of companies.

Figure 1: How To Calculate Incremental ROIC


Sources: New Constructs, LLC and company filings

We make it easy for the average investor to leverage the benefits of a high quality ROIC model. As our research continues to proliferate, it gets harder for investors and executives to overlook its merits. Figure 2 shows the companies with the highest and lowest incremental ROIC out of 3000+ companies under coverage.

Figure 2: Companies With Best/Worst Incremental ROIC as of July 1, 2016

Sources:   New Constructs, LLC and company filings.

Elite Pharmaceuticals’ 82412% incremental ROIC is the highest of all companies under coverage. This incremental ROIC means that the return earned on the new invested capital is over 82000%. See Elite Pharmaceuticals’ incremental ROIC each year dating back to 2000 here.

Ericsson ADR (ERIC), National-Oilwell Varco (NOV), KLA – Tencor Corp (KLAC), and PDF Solutions (PDFS) earn the second through fifth highest incremental ROIC. However, incremental ROIC alone doesn’t mean a company is a good investment. On one hand, Ericsson earns a Very Attractive rating due to its rising economic earnings and undervalued stock price. Meanwhile, PDF Solutions earns an Unattractive rating due to its negative economic earnings and high valuation. Here’s the Adjustment Page from our model, which shows exactly how we adjust Ericsson’s GAAP net income to calculate NOPAT. We also show how we convert total assets to invested capital.

Fossil Group (FOSL) earns the lowest incremental ROIC of all companies under coverage. See FOSL’s incremental ROIC for each year since 1998 here. Celsion Group (CLSN), Bridgepoint Education (BPI), American International Group (AIG), and NIC Inc. (EGOV) round out the five lowest incremental ROICs across 3000+ companies under coverage. See the adjustments page from our model of Celsion Group, where we show the adjustments to calculate NOPAT and invested capital. See CLSN’s incremental ROIC throughout the company’s history here.

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.

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