For quality investors, the Return On Invested Capital (ROIC) is one of the most important financial metrics.A high ROIC is key for value creation and it’s a great way to look at a company’s competitive advantage.
(I am provocative, but situation has changed drastically, even if profitability figures are still good, but market does not look at the past anymore on this name).
The company has several thousands warehouses throughout the entire world and has built a very complex logistical network that is next to impossible to replicate without expanding literally tens of billions of $ over a sustained period of time. If that qualifies as "no moat" for you, then good luck with your moaty cardboard tasting pizza chains!
Thank you for making this article available. With real estate investments, we call ROIC>WACC
Positive Leverage (cost of borrowing is less than the CAP rate or reverse of P/E). Think of a bank with the ability to borrow from the FED at a discount rate of say 2% and buy US Treasuries that yield 4%.
Excelente artículo, muy didáctido y muy bien expuesto. Pero me queda una duda y, he echado de menos si hay alguna trampa en el ROIC y cómo detectarla. Por lo demás excelente y muchas gracias por el esfuerzo
Regarding potentially new articles. Comparing 2 real companies (A,B) with equivalent ROIC but the calculated WACC (from finanacial reports) shows one companie being a better investment than the other one?
Thanks for reminding me about this! Things are really hectic right now with the launch but I'll write something about this soon! In the end it's all about the ROIC-WACC spread. So the higher the spread the better.
Great article. Thanks!
Thank YOU for reading it. You guys are the reason we keep going.
Couple examples of high ROIC companies?
Constellation Software (CSU) is as close as it gets in Canada IMHO .
One of Francois Rochon's favorites too. We will publish an article about Rochon's investment strategy very shortly.
One of my best quality companies is Novo Nordisk A/S $NVO:
- Gross Margins >83% in the Last 10 years; current TTM 84,2 %
- ROIC between 54 % and 81 % in the last 10 years; current TTM ~63 %
- and as a worldwide market leader for diabetes medicaments and $NVO lasting pronounced the first medicament against adiposity a huge moat
Good choice! We also own them in our fund. The only thing you (potentially) can't like about Novo Nordisk right now, is their valuation.
maybe today it is the only thing you can like 😂
(I am provocative, but situation has changed drastically, even if profitability figures are still good, but market does not look at the past anymore on this name).
Things can change really fast on the stock market! :)
One of our favorites is OTCM - 60% ROIC (5 year average)
This is a great example!
Deutsche Post. 20% ROIC over x number of years. Currently trading at P/E of less than 10.
I wouldn't consider Deutsche Post as a quality company.
Examples of companies with a high ROIC: Sherwin-Williams, Domino’s Pizza, Pool Corporation, and Adobe.
And the argument why it's not a quality company is...?
Main reason is that the company has no moat and profit margins are too low.
The company has several thousands warehouses throughout the entire world and has built a very complex logistical network that is next to impossible to replicate without expanding literally tens of billions of $ over a sustained period of time. If that qualifies as "no moat" for you, then good luck with your moaty cardboard tasting pizza chains!
Feel free to have another opinion, David.
Often looking at the stock price for periods of 10-20 years can tell you a lot. It gives an indication about how strong the business is.
One of the best on the subject. Thanks for sharing.
Thank you very much, Ajit. Means a lot to us.
Another awesome article. You have the gift of explaining things simply. Please keep it up.
Thank you very much, Eric. The best is yet to come!
Thanks for explaining how ROIC is a proxy for a moat.
We also have written an article about moats already which will be published soon.
Another great article, thank you very much !
Thank YOU for supporting us.
Reverse Dcf
Good idea. Will focus on this in the future.
Loved this article thank you
I appreciate it!
Thank you very much that helps me 👍
You're doing great!
It's difficult not to bookmark every article you publish - thank you!
I have a question around datafeeds: I assume you don't compute the ROIC and WACC manually for each and every stock you look at.
Which datafeed do you pull ROIC and WACC from? (e.g. Bloomberg)
Do you doublecheck ROIC and/or WACC manually once you have shortlisted a stock via datafeed?
In your experience, are there any high-quality datafeeds around also for retail investors?
Thank you in advance for your advice.
Hi Domenico!
Usually I use Bloomberg to get a first glance.
Before I invest in a company, I always dig into its annual report to calculate the figures myself.
Sharepad and Unclestock are great datafeeds for retail investors. Uncle Stock costs around $15 per month and Sharepad around $32 per month.
I hope this helps!
Thank you for making this article available. With real estate investments, we call ROIC>WACC
Positive Leverage (cost of borrowing is less than the CAP rate or reverse of P/E). Think of a bank with the ability to borrow from the FED at a discount rate of say 2% and buy US Treasuries that yield 4%.
Thank you for your message, Mike. This concept is very relevant in real estate too!
Oh my goodness, you are providing valuable information to all readers who don’t know financial knowledge,I really appreciate you
Thank you very much, Pavan! Means a lot to me.
That's marvellous news, thanks for doing this!
Thank YOU for reading it.
Excelente artículo, muy didáctido y muy bien expuesto. Pero me queda una duda y, he echado de menos si hay alguna trampa en el ROIC y cómo detectarla. Por lo demás excelente y muchas gracias por el esfuerzo
Excellent thanks!
Could you write an article on valuation on growth, or to put it in another way: When to buy growth? 😃
Thank you for the great suggestion. Will do this in the future!
Thanks for the absolutly great sharing!
Regarding potentially new articles. Comparing 2 real companies (A,B) with equivalent ROIC but the calculated WACC (from finanacial reports) shows one companie being a better investment than the other one?
Thanks for the suggestion! Will take this into account!
Hi! thanks for the good work, Any update regarding my suggestion?
Thanks for reminding me about this! Things are really hectic right now with the launch but I'll write something about this soon! In the end it's all about the ROIC-WACC spread. So the higher the spread the better.