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Invested capital turns are an important consideration in the analysis of return on invested capital (ROIC). This metric measures a company’s operating revenues relative to its average invested capital. It is the multiplier through which a company’s NOPAT margin (or core operational efficiency) is translated into its ROIC, which also accounts for the cost of the balance sheet. In other words, it is a key measure of balance sheet efficiency.

We’ve previously demonstrated that ROIC is the primary driver of stock prices. Invested capital turns can also provide insights into the capital intensiveness of a business and whether it has deployed capital prudently over time. Since the market assigns value to companies that produce the most cash per capital invested, knowing which companies have deployed invested capital most efficiently is an important factor in the investment decision-making process.

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

Figure 1: How to Calculate Invested Capital Turns

(Operating Revenue t) / ((Invested Capital t + Invested Capital t-1)/2)

Sources: New Constructs, LLC and company filings

Figure 2 below shows why invested capital turns matter. The higher a company’s ratio of invested capital turns, the lower the required NOPAT margin to earn an adequate ROIC. Conversely, the lower a company’s ratio of invested capital turns, the higher the required NOPAT margin to earn an adequate ROIC. General takeaways from this relationship include: 1) naturally lower-margin businesses need to be capital efficient; 2) naturally more capital-intensive businesses need to be margin efficient; and 3) high-margin, capital-light business models are capable of generating exceptionally high ROICs.

Figure 2: Why Invested Capital Turns Matter

ROIC t = (Invested Capital Turns t) * (NOPAT Margin t)

Sources: New Constructs, LLC and company filings

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