“ROIC is perhaps the most important metric in value investing,” Royal writes. “By determining a company’s ROIC, you can see how well it’s using the cash you entrust to it, and whether it’s actually creating value for you. Simply put, ROIC divides a company’s operating profit by how the amount of investment it took to get that profit.”
“Ultimately, we’re looking for companies that can invest their money at rates that are higher than the cost of capital, which for most businesses lands between 8% and 12%,” Royal writes. “Ideally, we want to see ROIC greater than 12%, at minimum… Let’s look at Apple and two of its industry peers to see how efficiently they use capital.”
Royal writes, “While Apple and Dell clearly meet our 12% threshold for attractiveness, they have consistently reduced their return on capital over time. That’s a hardly a real reason to worry, however, given their significant levels of ROIC.”
Read more in the full article here.
