Return on Invested Capital “ROIC†is the most dependable indicator to have in your investor toolbox.
Forecasting performance using ROIC has stood the test of time. To be confident you are investing in a good company, ROIC will help you to separate the winners from the losers.
Profitable stock picking comes down to a simple question: is this company going to help my portfolio grow? But without a crystal ball, how can you be sure?
High-ROIC companies yield high investment returns
ROIC measures how much a company makes for every dollar it spends.
Companies with high ROICs can grow quickly because they are “investing†in their own assets at a better return than can be found elsewhere. This performance is what fuels growth and separates value from the companies with low-to-average ROICs.
Take two companies: Company A has an ROIC of 5%, and Company B has an ROIC of 10%. If both companies invest $100 over the course of the year, we would expect Company A to earn $105 and Company B to earn $110. In order for Company A to get the same returns as Company B, it would have to invest $200.
A company with a higher ROIC will generate more earnings with less capital invested. And more earnings will yield higher investment returns.
For example, Ambarella Inc.’s (AMBA) ROIC exceeded 100% for two years running. New Constructs clients who knew the value of ROIC were able to earn a return of 187.26% over a year and 300.78% return over 22 months.
On the other hand, Twitter (TWTR) started off 2013 at $67.50 per share after a strong stock market rally at the end of 2012. Fans of this tweet-worthy site were thrilled, but our clients knew that this bird has a negative ROIC of 8.80%. Avoiding the urge to buy TWTR saved our clients from suffering a 39.3% loss over six months, and when you only have 140 characters, you simply can’t afford to lose.
Use ROIC today to build your best investment portfolio yet
When you have the right tools stock picking is easier. One new result to monitor can help you stay focused on the winners and eliminate low probability ideas. ROIC provides that focus.
