ROIC: The Paradigm For Linking Corporate Performance To Valuation


It’s incredible that corporate executives and the market as a whole continue to depend on such flawed numbers when we already have a measure that is clearly linked with value creation: return on invested capital (ROIC).

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If ROIC Is So Great, Then Why Doesn’t Everyone Use It?


Why do investors, executives, and the financial media focus on reported earnings and other metrics such as EBITDA that ignore the balance sheet? Why aren’t executives around the world adopting ROIC in order to boost returns?

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True Value Investing Still Works


Investors looking for value need to take a holistic approach that measures a company’s ability to deliver economic earnings to investors and quantifies the expectations for future cash flows embedded in its current stock price.

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4 Reasons ROE Is Not A Useful Metric For Investors


Recently, we ran through the various flaws in the price to earnings ratio and explained why investors need to be paying more attention to return on invested capital (ROIC). This week, we’re tackling another of the market’s favorite metrics, return on equity (ROE). Return on equity has a very simple formula: It’s tempting to think…

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The Market Values High ROIC Companies


Last month, Fortune released its list of the top 50 businesspeople of the year. The recognition these CEO’s are receiving shows that the market cares about ROIC, even if many investors aren’t explicitly talking about it.

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High ROIC Stocks Outperformed in 2008


What do these companies have in common? They are the only surviving S&P 500 stocks to rise 10% or more in 2008. In the midst of a collapsing market and the subsequent damage, these seven stocks made good money for investors.

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Why PE Ratios Are Not A Good Measure Of Value


We’ve pointed out the flaws in the price to earnings (PE) ratio many times before. Chief among these flaws is the fact that the accounting earnings used in the ratio are unreliable for many reasons:

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Non-GAAP Earnings Boost Executive Pay At The Expense Of Shareholders


Unadjusted GAAP earnings already obfuscate true profits enough, and non-GAAP earnings lead investors even farther astray. In turn, non-GAAP earnings are often used to line the pockets of insiders at the expense of shareholders.

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Too Much Goodwill: A Red Flag For Your Portfolio

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Analysts and investors tend to spend very little time on Goodwill when looking at financial statements. In reality, Goodwill is an important number to keep an eye on. Since it reflects the money paid for acquisitions above the market value of the acquired company, it can signal overpayment, reckless spending, and the potential for damaging write-downs in the near future.

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3 Reasons Why Amazon’s “Cash Flow” Is A Trap


In truth, neither AMZN’s $5.5 billion of operating cash flow nor the $1 billion in free cash flow that bulls claim reflect the actual economics of the business.

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How to Value a Stock, Step 2: Invested Capital


The second step to gauge the value of a company is to determine the sum of all cash that has been invested in a company over its life without regard to financing form or accounting name. We call this Invested Capital.

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Amazon’s New Smartphone Spells Trouble for Apple (AAPL)


A high quality smartphone from Amazon that undercuts higher-priced competitors could mean more serious trouble for Apple’s iPhone and the company’s declining profit margins.

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The Disconnect between Investment Theory and Practice

A disconnect between investment theory and investment practice exists and is manifested in the way investors should value stocks versus the way they actually do value stocks.

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September’s Most Attractive Stocks Available to the Public Today

New Constructs released September’s Most Attractive Stocks report to the public today.

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August’s Most Attractive Stocks Available to the Public Today

The Most Attractive Stocks portfolio (+5.8%) outperformed the S&P 500 (+4.4%) last month. There are 16 new stocks in the Most Attractive portfolio for this month.

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Overfunded Pension Plan Assets – Invested Capital Adjustment


Overfunded pension assets are similar to excess cash, and should not be included in the calculation of return on invested capital (ROIC).

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Deferred Compensation Assets – Invested Capital Adjustment


Deferred compensation plans delay employee compensation until a later date. The assets held for these plans are used to compensate employees in the future, not to generate profits for the company. As such, they should not be factored into the calculation of a company’s return on invested capital (ROIC).

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July’s Most Attractive Stocks Available to the Public Today

The Most Attractive Stocks portfolio (+1.9%) outperformed the S&P 500 (+0.4%) last month.

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Off-Balance Sheet Reserves – Invested Capital Adjustment


Reported assets don’t tell the whole story of the capital invested in a business. Accounting rules provide numerous loopholes that companies can exploit to hide issues and obscure the true amount of capital invested in a business over its life.

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Implied Interest For Operating Leases – NOPAT Adjustment


Converting GAAP data into economic earnings should be part of every investor’s diligence process. Performing detailed analysis of footnotes and the MD&A is part of fulfilling fiduciary responsibilities.

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