#education ROIC: why is it one of the best multipliers for | WhiteRaven Capital
#education
ROIC: why is it one of the best multipliers for finding attractive promotions?
From the point of view of a business owner - before you invest money in a company, you need to understand what kind of profit it will bring for every dollar invested. For this purpose, there is a measure of return on capital invested in the company - ROIC.
ROIC gives an objective view of how efficiently a company uses the money invested by its shareholders and debt holders to generate profits. Calculated by dividing net operating income after taxes by invested capital, ROIC is expressed as a percentage.
For example, an ROIC of 15 percent says that for every dollar invested, the company will make 15 cents of profit. This is much higher than the risk-free return on government bonds, which means it's a company you can invest in.
Some investors look exclusively for companies with a high ROIC because they consider it the main indicator of management efficiency, its ability to convert investments into profits.
Of the companies with a capitalization of more than $10 billion, included in the S & P 500 or Nasdaq 100, you can select some of the most effective in terms of ROIC.
The absolute leader is the top-level domain name registrar Verisign, with a 3-year average ROIC of 168%. The "non-dusty" domain name business has generated $686 million in free cash flow from $1.276 billion in revenue over the past 12 months.
The second place is shared by online discounter Ross Stores (3-year ROIC of 44%), accounting and tax software developer Intuit (41%), and coffee shop chain Starbucks (39%). Efficient isn't cheap: the companies are trading at forwarding P/Es of 29, 46, and 38x, respectively.
