Capital allocation is the most important task of management.
Here are 5 metrics you should know 👇
1️⃣ Return On Assets (ROA)
🤔 What is it?
A metric that indicates a company's profitability in relation to its total assets.
🧮 Formula?
Net Income / Total Assets
🎯 Target?
Seek for companies with a ROA larger than 5%
2️⃣ Return On Equity (ROE)
🤔 What is it?
Financial Ratio that shows how well a company is managing the capital that shareholders have invested.
🧮 Formula?
Net Income / Equity
🎯 Target?
Seek for companies with a ROE larger than 15%.
3️⃣ Return On Invested Capital (ROIC)
🤔 What is it?
Shows you how efficiently a company is allocating its total invested capital.
🧮 Formula?
NOPAT / Total Invested Capital
🎯 Target?
Seek for companies with a ROIC larger than 15%.
4️⃣ Return On Invested Capital Variant
🤔 What is it?
Shows you how efficiently a company is allocating its invested capital excluding goodwill and cash.
🧮 Formula?
NOPAT / Total Invested Capital - Goodwill - Cash
🎯 Target?
Seek for companies with a ratio higher than 20% for this metric.
5️⃣ Return On Capital Employed (ROCE)
🤔 What is it?
A financial ratio that measures a company's profitability in terms of its capital employed.
🧮 Formula?
EBIT / Capital Employed
🎯 Target?
Seek for companies with a ROCE > 20%.
🔎 What's your favorite ratio to analyze capital allocation? Join the discussion in the comments!

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