ROIC is a key metric for investing
But most investors don't understand ROIC
Here's how to use the metric ROIC when investing:
But most investors don't understand ROIC
Here's how to use the metric ROIC when investing:
1/ ROIC stands for Return on Invested Capital and it's a crucial metric to evaluate a company's profitability.
ROIC measures the amount of money a company generates on each dollar it invests in its operations. It takes into account both debt and equity financing
ROIC measures the amount of money a company generates on each dollar it invests in its operations. It takes into account both debt and equity financing
2/ It is an important indicator of how efficiently a company uses its capital.
Let's take a look at an example
Say a company invests $1 million in a new project and generates $200,000 in operating income.
The company's ROIC would be 20% ($200,000/$1,000,000).
Let's take a look at an example
Say a company invests $1 million in a new project and generates $200,000 in operating income.
The company's ROIC would be 20% ($200,000/$1,000,000).
3/ A higher ROIC is generally better because it means the company is generating more income on each dollar invested.
This is a sign of strong financial performance and efficient capital allocation.
This is a sign of strong financial performance and efficient capital allocation.
4/ On the other hand, a low ROIC could indicate that a company is not making the most of its investments or is using too much capital to generate income.
This can be a warning sign for investors.
This can be a warning sign for investors.
5/ Let's take another example.
Apple has consistently maintained a high ROIC over the years.
In 2021, their ROIC was 26.5%, which is higher than the industry average of 9.7%.
This is a sign of strong financial performance.
Apple has consistently maintained a high ROIC over the years.
In 2021, their ROIC was 26.5%, which is higher than the industry average of 9.7%.
This is a sign of strong financial performance.
6/ On the other hand, a company like Tesla has a lower ROIC of 5.5% in 2021.
This is partly because they have been investing heavily in research and development, which has yet to generate significant returns.
This is partly because they have been investing heavily in research and development, which has yet to generate significant returns.
7/ It's important to note that ROIC should be used in conjunction with other financial metrics to evaluate a company's financial health.
A company with a high ROIC but a high debt-equity ratio may not be as attractive as a company with a lower ROIC but a lower debt-equity
A company with a high ROIC but a high debt-equity ratio may not be as attractive as a company with a lower ROIC but a lower debt-equity
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