The Importance Of Return On Invested Capital

valueinvesting
investing

#1

New to the forum, but thought I would get one of my thoughts on this ## out…

Return On Invested Capital Is Absolutely Crucial For Investing

One of Warren Buffett’s favourite models for investing is return on invested capital. While the concept is self-explanatory, it is a metric that unlocks hidden value for investors…

ROIC is a brilliant metric for measuring the success of a companies brand, “moat”, or in simpler terms their sustainable competitive advantage.

The metric gives investors a general viewpoint on how well a company generates returns (and how well it could beat the index)

Below I have pulled up some great performers over the past ten years and I will compare them to the benchmark:

KLA Tenor
KLa is the largest player in the semi-conductor control segment - it controls almost 50% of the market.

From 2013 to 2017, it boosted its ROIC from 29% to 56%.

Since 1980 it has comfortable beaten the benchmark.

Amgen
Is another high performer was a 22% ROIC for most of its lifetime…

Since 1983, Amgen has crushed the S&P without mercy.

Ross Stores
Ross Stores is one retailer that is thriving in an Amazon lead world.

It has had 20% ROIC for the past seven years and has compounded revenue at 8% for those years as well.

Again, it has crushed the S&P.

Discover Financial Services
DSF is another big player with 19% ROIC for the past several years.

It has a customer satisfaction ranked first in customer satisfaction for the past three years.

It has only gone public since the 2000s, yet it has comfortably outpaced the index since then…

It is not a coincidence that FAANG stocks are ranked the highest for returns on invested capital. Obviously Apple, Microsoft and the other tech behemoths ranks very very highly for ROIC.

But another unlikely winner is MasterCard, which has returned 600% over the past few years - or 25% when compounded annually over a decade…

Ignore ROIC calculations at your peril!


#2

Wow David, thanks for sharing! Where can I get index funds investing in companies with high ROIC metrics!

That’s the real question


#3

Thanks David, really helpful stuff!


#4

No worries guys, it’s an absolute pleasure!