Methodology
Returns on capital: why ROIC against the cost of capital matters
Profit tells you how much a business makes. Return on invested capital tells you how much it makes on the money it needs, and whether growing creates value at all.
Profit is not enough
Two businesses each earn $100 million. One needed $500 million of capital to do it; the other needed $5 billion. The first returns 20% on its capital, the second 2%. Their profits match; their economics do not.
Return on invested capital (ROIC) is that comparison made routine: after-tax operating profit divided by the capital tied up in producing it.
How we measure it
StockValuer computes ROIC for each complete fiscal year from the company's published quarters: operating profit after tax, taxed at the company's median effective rate over the years shown, divided by debt plus shareholders' equity less cash at the year end. Goodwill stays in equity, so capital spent on acquisitions counts as capital the business used.
A year where that capital is zero or negative, which can happen after years of buybacks, shows no ROIC rather than a meaningless one.
The comparison that matters
ROIC on its own is a number. Set beside the cost of capital, the return that lenders and shareholders together require, it becomes a test: a business earning above its cost of capital adds value with each dollar it reinvests, and one earning below it destroys value as it grows.
That is why the Overview's “Is it a good business?” chapter shows each year's ROIC against the cost of capital from the latest valuation, and counts the years it was above. Consistency matters as much as level: a return that has held for a decade says more than one good year.
Return on equity, and banks
Return on equity (net income over shareholders' equity) sits beside ROIC. Debt raises it as surely as good operations do, which is why ROIC is the cleaner test for most companies. For a bank the reverse holds: borrowing is the business, invested capital has no clear meaning, and ROE is the measure shown.
What else the chapter shows
Returns are read with three other things: how steady the margins have been, what happened to the share count, and how much debt the business carries against a year of operating profit. The screener can filter on returns too, for every company whose ROIC exceeded its cost of capital in each of the last three or five years.
Terms in this guide