Return on Invested Capital (ROIC) is a tool used by value investors to determine whether or not a company has a sustainable advantage over its competitors. Some investors call this sustainable competitive advantage a “moat.” Moated companies tend to dominate the industry niches in which they operate, and the stock market tends to reward investors in these companies with higher share prices as they grow within their niche.

Return on Invested Capital (ROIC) = Net Operating Profit After Tax (NOPAT) / Invested Capital Return on invested capital is a good way to spot companies that may have a moat, because it measures how efficiently a company uses your available money to create the profit it generates. If a company has a great return on the capital it invests, especially compared to its competitors, it is probably because the company has a more efficient way of producing its goods or services, or it can charge prices that allow it to make more profit. margin than its competitors.

Here are 4 reasons why return on invested capital is a metric you should use to spot companies that can continue to achieve above-average growth:

1) Management Efficiency – ROIC shows how well a management team generates operating profits versus how much money they use to generate those profits

2) Clarify the income statement: Instead of focusing solely on net income (the “E” in the P/E ratio), the ROIC uses NOPAT, which removes items such as investment income and interest expense (including others), which gives a much clearer picture of how much profit the company is actually generating as a result of its lucrative operations

3) By using investment capital rather than just capital or assets (such as return on equity (ROE) or return on assets (ROA)), return on investment capital uses deployed capital AND capital from debt, and eliminates the cash that is in a bank. account charging interest instead of earning income through business operations

4) Companies with a high return on invested capital within their industry are generally leaders, or emerging leaders, within their market niche.

Using the ROIC formula shown above, you can test what this article says with a quick visit to MSN Money and comparing the historical performance of Google and Yahoo invested capital rankings (you probably used one of these search engines to find this article) . By looking at the ROIC values ​​of these two companies and looking at the relative performance of their stock price, you may find the results illuminating.