Return On Invested Capital (ROIC)
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.
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.
As we demonstrate in “ROIC: The Paradigm For Linking Corporate Performance To Valuation”, ROIC is the primary driver of stock prices. Growth and duration of profit growth also help drive stock prices, but ROIC is, by far, the most important driver because the market cares most about assigning value to the companies that produce the most cash per capital invested in them. If the opposite were true, the market would quickly go bankrupt. If you believe in any sort of efficiency in the stock market, ROIC is preeminent.
The formula (see Figure 1) for calculating ROIC is 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 ROIC
NOPAT/Average Invested Capital
Or
NOPAT/Revenue * Revenue/Average Invested Capital
Sources: New Constructs, LLC and company filings
“If ROIC Is So Great, Why Isn’t Everyone Using It?” The short answer is twofold: (1) most research comes from sell side firms whose underwriting businesses are not aligned with exposing the true profitability of companies and (2) it is a lot of work. As an independent firm, we have no conflicts with our clients. Our cutting-edge technology to analyze footnotes enables us to scale our unique ROIC model building expertise.
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.
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