I am an Indian. Your explanation is awesome. Examples that are illustrated in this video are very good. First time I understand importance of Return Capital Invested.
If this video was helpful for you, hit the like button and leave a comment down below. (Both really help the channel.) What kind of ROIC do some of your stock investments have? Let me know in the comment section!
Thanks, Morten! :D Glad to 'see' you on the channel. If anyone is interested, Morten started a new Facebook group that you might find helpful for dividend investors.
Great video: Nice relatable analogy, easy to follow and I love the couple of snippets of humor ("a question that has been plaguing philosophers for decades" ha ha). Can you do a video explaining how to calculate ROIC from an income statement/balance sheet, if you haven't?
Got to love it when someone recommends a stock because of hype, unsustainable dividend yield, etc and you look at 5 year return on invested capital of a negative number. That's usually when I think that maybe the company would be better off doing nothing new and investing in treasury bonds - it'll work out better than silly acquisitions that make no sense.
Great video (although it seems the end got cut off in editing?). 6:20 - in investing would you call this positive marginal ROIC or am I conflating terms? 😅. Marginal because we're interested in the rate of change (derivative) over time, positive because obviously we want it to increase.
Excellent explanation on the importance of ROIC and the value of it to business. The entire Wallst analysts continue to focus on P/E which can be misguiding as you rightly pointed. New to your channel, love it already! 👏
Quick question, I love the ROIC analysis and the examples you provided. BAC has a ROIC of only 1%, yet Warren Buffet holds a very large position of this stock. Can you please provide some context to this? Thanks.
Hmm...I need to watch this video again. I am getting the concept but still need to re-watch it as I also know nothing about basketball. Where do you find information about ROIC for a company? Or how do you calculate it?
Great explaination. Try to elaborate Growth in Net Income more than Growth in Invested Capital. This is the key of ensuing Growth in Intrinsic Value. Cheers
Hi Nathan, very interesting video! You wrote somewhere in the comment section that ROIC is not the best KPI for banks (better: ROE). What about asset managers like Brookfield: 1) What would be the best KPI and 2) is it as important if the specific market is expected to grow exponentially within the next years? Regarding your basketball analogy, this would be the same as if you not only had 90 chances to score but 10-20% more each year. Would this make up for a not so great ROIC of around 5-10%? Thanks and best, Marc
Hi Marc, I’m not sure on the asset managers. They are definitely capital light, so ROIC may not be as useful. What I would probably do is consider them relative to one another. And I would look at both ROIC and ROE to see whether there was a meaningful difference between any of them and who has the advantage. But, generally, asset managers have an enviable business model that grows without adding extra capital, using other people’s capital. So most of the asset managers are pretty moaty, so long as their asset base is sticky and not fleeing at the first sign of underperformance.
So things like free cash flow, debt-to-equity, etc. I think these could be good things to talk about moving forward as far as things you can look at for small caps, large caps and so on. Different data to help inform others is what I also try to focus on to help people learn to invest. I mean covering the buffet indicator or psychological aspects are also good to cover. Keep up the good work, sir. 2ill keep recommending people like you 👍
Hi Nathan, thanks for the info. I was researching this type of info before your video came out. I understand better with your help. The issue I was stuck on before is sites publish different method types. An example is for LMT on E-Trade, ROIC is 19.95 (ttm), but Morningstar the ROIC is 42.98 (ttm), and Stansberry shows 45.94 (2020). I understand you may not know, but the difference can cause a mental break down.
There is a difference in calculation between NOPAT, EBIT, cash flow, etc. all being used in the numerator. Also, some denominators use capital employed instead of invested capital.
I only just came across your channel. Kudos, great content. Ask people to like and subscribe near the start. Your likes to views ratio should be much higher for such good content.
Nathan I can’t thank you enough for this …. I just finished my mid year review but I’ll be going back to add ROIC and see how the various companies compare
It might be helpful to look at multiple years. I’m not sure if you’re looking at just the last 12, but generally I think buffet would look at a five-year average or so.
Next era does a lot better because they have a super stable business and have quite a bit of leverage. So the returns on equity or more like 13%. Generally that much leverage might not be favorable, but they do have a very very very consistent business model so they can get away with it a little more than others could.
Hi Nathan , great video, you really adding value to the investors community. I am new subscriber (from yesterday). By the way . Can you share any website where I can find ROIC? (Besides Qf) . Thanks a lot and congrats for the high quality
Is there potentially a video you could do that would educate us on how we would go about and do a return of capital investment for a company ourselves? I feel like yahoo finance has the data required but I am not sure what would be the best way to analyze the information.
Thank you, Nathan. Very well explained. I just don't know why VRSN stock price does not follow the stock's financials. Free Cash Flow has been going up. Net Income, Revenue, Net Profit Margin also been going up. Also why Warren Buffett would hold AXP with such a low ROIC. Well it's not the first time he does NOT follow his own rules.
Morningstar has one but it only has ROE. I'm actually not sure of any that have ROIC and are free. I use one from S&P Global, but let's just say it's pretty expensive for the retail investor... It's such a poorly followed metric that there doesn't seem to be much on it.
Great video. I generally agree with paying attention to the ROIC stat but only a handful of companies maintain consistent 10+% ROIC year in and out. Even BRK.B hasnt had the greatest track record with it.
@@NathanWinklepleckCFA Quick follow up question. On the QuickFS site I can see "Return on Assets" and "Return on Equity". Just to be sure, the ROIC is the "Return on Assets" right?
Hi Nathan, I'm a fan of your videos and the free audio book. I was wondering if you did a NFL draft pick for 2021. Mostly curious as to how the 32 companies have done 1 year later. Thanks and I look forward to more of your videos.
Seeking alpha only has a Return on Total Capital metric which I have checked is different from the ROIC Morningstar provides. The thing is, does ROIC history matters? obviously if it does I would like to see an increase throughout the years no? Also, if ROIC history does matter, where can I see it without dedicating my entire yearly dividend income to a Morningstar subscription?
Correct. I’d check out QuickFS to see if that meets your needs on the data. And everyone measures ROIC differently. I personally value consistency, but a rising ROIC would definitely be a good sign 👍
On of my Canadian holdings, Goeasy Ltd. has a ROIC of 16.2% which is quite healthy. I've usually used ROE to evaluate my positions. How I see a lot of value I'm using ROIC.
Great video. Thx. Questions: I looked the RIOC of various stocks and found a few that really surprised me: DDOG, CAN and VRSN. Not great companies compared to AAPL, SBUX or HP but with ROIC TTMs of over 100%!?!? What’s the deal? Do you need to weigh their ROIC against their ROEs?
High ROICs may indicate they have minimal assets, like a data/software company. Still impressive, but intellectual capital is not captured on balance sheet. VRSN is legendary. Buffett owns that one.
Now it makes sense why companies with low Return on invested capital do buybacks. The reason is due to it not going back into the business because the return would be bad and it would be better for them to simply buyback shares to in a sense do a burn like Shiba Inu since it cannot utilities that invested capital in a meaningful manner. It increases the proportion for the shareholders providing growth in a stagnant company.
Hey Nathan, I love the basketball analogy, Kawhi (fav player) is a perfect example haha...but then there are very few players like him in the league. Does the same scarcity of efficient players apply to companies with good/great ROIC in the S&P 500?
Thought-provoking video although us "non sporty" types had no idea what you were talking about for the first half :-). A quick lookup on Guru-Focus revealed that some of the putative darlings of investors e.g. Realty Income Corp (O) have ROIC of only .53. Thanks for bringing it to the notice of your subscribers. Appreciated.
You got it, Santinder! :D Yes, Realty Income isn't nearly as good as some people think. Then you throw on there that they issue equity and it's just not at all something I would want to invest in, but that's just me. (Everyone should decide for themselves, of course. ;)
Is ROI/ROIC an appropriate measure for banks? It seems like banks either are rarely to never good investments or ROI isn’t the best measure for them. Any pointers appreciated
🙏 thanks! If Apple ROIC is 40% then how come it has a very slow revenue growth? I must be missing something here. But, what’s the point if this is not reflected on Apple growth?
The key is what percentage are they reinvesting at 40%? If you look at combined buyback and dividends, not much. Still, it reflects a wide economic moat and despite the slow growth one that is going to generate free cash flows for investors with little relative investment.
@@NathanWinklepleckCFA Thank you Nathan, I enjoy your analyses. I suspect your 1,000,000+100,000 example is too simplistic. What is the hundred thousand was needed to meet the 1 million machine more effective for example? Anyway I will keep looking and learning!
On the other end, a company investment of capital might only pay off after a few years and not necessarily within the same year or year +1 (ie: new factory, new medical research). Also a company seeing earnings grow, while only doing a very very low investment of capital can have a very high ROI, this ROI wouldn't be linked to capital invested (ie: price of goods grow while consumer base and product stay the same)
@@NathanWinklepleckCFA Thank you very much. But, please elaborate by making a video and telling all of us the respective formulae to calculate both ROCE and ROIC and which is better.
Invested capital does not. The “return” is usually calculated as EBIT, which does include operating expenses but adds back debt (since debt is included in the denominator)
Very informative as always, I have read from buffet that the return of the stock will match the ROIC over long periods of time, But it’s not always the case right? Since some companies will be fairly valued/overvalued in term of price. For example, apple has ROIC of 40%, but this ratio is priced in, and it won’t deliver the same return over time. My question is, when can I use ROIC in valuing a stock, and how do I know if this ratio is priced in or not?
Very perceptive of you; yes, the higher the ROIC the higher the P/B ratio will be. The returns will match the ROIC the longer you own it. In general; you could expect ROIC only if the price relative to invested capital was 1. In most cases, it would be much higher. I’d look at the current 40% ROIC as temporary since competition should erode it. The key is predicting how long ROIC is sustainable at high levels. If it stays at 40% for the next 20 years (unlikely) then the business will bail you out of a high price today. If it erodes back to 10%, then the current premium will look expensive. Buffett’s genius was buying high and sustainable ROICs that the market was pricing at sustainably low ROIC levels. Not many of those exist today in this low rate world.
When modifying a Portfolio View on Morningstar, I can't find ROIC in the list of columns to add. Is ti there but with a different name? it is quite inconvenient to look at each and every stock, go to the Financials tab, and find the ROIC.
ROIC is a efficiency ratio but it doesn't answer the most important question if the company is cheap or expensive but DCF or PE do (to the certain degree).
You're right that there is no valuation ratios here, which would've been a good idea. The problem is that I despise all the ratios commonly used on free stock screeners (like I was using). P/E is rubbish and shows no evidence of working any longer. DCF would be ideal, but it's wildly dependent on your inputs, so that's subjective and based on your views of the company and future growth. The best single metric I've seen is EV/EBIT. There is good research on that one. Thanks for the constructive criticism; I appreciate that.
capex is usually static, whilst profitability is dynamic. ie: you invest 100K and you make only an extra 2K per year, but that extra 100K investment may have enabled you to stay competitive in the market whilst had you NOT invested in the company, a competitor could have done so, taken market share and DROPPED your earnings by doing so. .....shit ain't so straightforward when you think about the bigger picture.
Assume a company has a high ROIC and that it returns its earnings to shareholders as dividends. Such a company will have a stable (static) stock price and a stable (static) dividend yield. So, even though the company has a high ROIC, it's not necessarily a good investment. It becomes a good investment when it reinvests some of its earnings into its business. Assuming it continues the produce a high ROIC, its stock price (and its invested capital) will grow at a compound rate, which is what you want. So, it seems to me that a high ROIC is not necessarily a good basis for investing in a company. You need a high ROIC along with a compounding amount of invested capital. The ROIC need not increase. All that's needed is that it does not decrease as the company's invested capital grows at a compound rate.
I don't understand your example. How could a company earning $1million INCREASE earnings by 10% by investing $100k only earning 2%? They have to pay interest on that debt costing at least 2%? So the earnings would not increase at all, unless you are talking about EBITDA. If so, that is a problem with focusing on EBITDA. The conclusion is the same: this is not an attractive company. But companies with good ROTA will have good eps growth if the company has reinvestment opportunities, which shows that the two measures are related.
this is what's happening with Intel and AMD right now: AMD took the lead and marketshare from intel, so intel is HEAVILY investing in capex to be able to retain competitiveness and retake marketshare, but shareholders everywhere are FREAKING the fuck out because the financials look bad----intel spending a LOT whilst having a bad year = "intel making bad money choices" rather than "intel investing in future competitiveness and working towards retaking marketshare"
I am an Indian. Your explanation is awesome. Examples that are illustrated in this video are very good. First time I understand importance of Return Capital Invested.
Thanks a lot and glad it was helpful!
If this video was helpful for you, hit the like button and leave a comment down below. (Both really help the channel.) What kind of ROIC do some of your stock investments have? Let me know in the comment section!
Great video, Nathan! Probably one of the best videos you've made - at least of the ones I've watched! Love the basketball comparison...
Thanks, Morten! :D Glad to 'see' you on the channel. If anyone is interested, Morten started a new Facebook group that you might find helpful for dividend investors.
Great video: Nice relatable analogy, easy to follow and I love the couple of snippets of humor ("a question that has been plaguing philosophers for decades" ha ha). Can you do a video explaining how to calculate ROIC from an income statement/balance sheet, if you haven't?
Please reply to this if you done a video how to calculate ROIC from a n income statement/bal-sheet?
My guess is, take net income (from the income statement) and divide by total non-current assets (from the balance sheet).
Got to love it when someone recommends a stock because of hype, unsustainable dividend yield, etc and you look at 5 year return on invested capital of a negative number. That's usually when I think that maybe the company would be better off doing nothing new and investing in treasury bonds - it'll work out better than silly acquisitions that make no sense.
Right on, Jeff. Lots of companies do it, though. Capital allocation is key; most investors ignore it.
Well, at a certain point if everyone crowds into the same trade, compresses yields toward zero or even negative bond yields. 🤷
Great video (although it seems the end got cut off in editing?). 6:20 - in investing would you call this positive marginal ROIC or am I conflating terms? 😅. Marginal because we're interested in the rate of change (derivative) over time, positive because obviously we want it to increase.
Excellent explanation on the importance of ROIC and the value of it to business. The entire Wallst analysts continue to focus on P/E which can be misguiding as you rightly pointed. New to your channel, love it already! 👏
Welcome aboard!
Nathan, I went back and listed to it one more time.....so glad I did
Never have i give attention in roic, until i watched this video. Thank you for this very informative video.
Glad you found it helpful!
Great explanation for a newbie like me.This is the one of the best channels I follow. Easy to understand and to the point. Thank you
Thanks, Monika! I’m glad you’re finding the videos helpful.
Are there any user friendly and preferably free tools that provide this metric?
Nathan: how about a video on how one finds these elements so we can do the ROIC calculations.
Quick question, I love the ROIC analysis and the examples you provided. BAC has a ROIC of only 1%, yet Warren Buffet holds a very large position of this stock. Can you please provide some context to this? Thanks.
Banks have a different capital structure, so ROE is the better metric for those
Hmm...I need to watch this video again. I am getting the concept but still need to re-watch it as I also know nothing about basketball. Where do you find information about ROIC for a company? Or how do you calculate it?
ROIC is on Zack's stock screener.
Great explaination.
Try to elaborate Growth in Net Income more than Growth in Invested Capital.
This is the key of ensuing Growth in Intrinsic Value.
Cheers
So you mean like an increasing ROIC?
Hi Nathan, very interesting video! You wrote somewhere in the comment section that ROIC is not the best KPI for banks (better: ROE). What about asset managers like Brookfield: 1) What would be the best KPI and 2) is it as important if the specific market is expected to grow exponentially within the next years? Regarding your basketball analogy, this would be the same as if you not only had 90 chances to score but 10-20% more each year. Would this make up for a not so great ROIC of around 5-10%? Thanks and best, Marc
Hi Marc, I’m not sure on the asset managers. They are definitely capital light, so ROIC may not be as useful. What I would probably do is consider them relative to one another. And I would look at both ROIC and ROE to see whether there was a meaningful difference between any of them and who has the advantage. But, generally, asset managers have an enviable business model that grows without adding extra capital, using other people’s capital. So most of the asset managers are pretty moaty, so long as their asset base is sticky and not fleeing at the first sign of underperformance.
So things like free cash flow, debt-to-equity, etc. I think these could be good things to talk about moving forward as far as things you can look at for small caps, large caps and so on. Different data to help inform others is what I also try to focus on to help people learn to invest. I mean covering the buffet indicator or psychological aspects are also good to cover. Keep up the good work, sir. 2ill keep recommending people like you 👍
Oh yeah, and I'm always up for a good book recommendation
Thanks, Rick! Yes, those would be good topics to cover in the future.
Warren Buffett's Letters to Shareholders :)
Hi Nathan, thanks for the info. I was researching this type of info before your video came out. I understand better with your help. The issue I was stuck on before is sites publish different method types. An example is for LMT on E-Trade, ROIC is 19.95 (ttm), but Morningstar the ROIC is 42.98 (ttm), and Stansberry shows 45.94 (2020). I understand you may not know, but the difference can cause a mental break down.
There is a difference in calculation between NOPAT, EBIT, cash flow, etc. all being used in the numerator. Also, some denominators use capital employed instead of invested capital.
Wow this is fascinating stuff. The ford and At&T results are crazy. Btw it cuts off before your final words. is also what?? is also what??????
Oh lol I don't know - TH-cam editor might have cut it off. I'm sure it wasn't important. ;)
I only just came across your channel. Kudos, great content. Ask people to like and subscribe near the start. Your likes to views ratio should be much higher for such good content.
Nathan I can’t thank you enough for this …. I just finished my mid year review but I’ll be going back to add ROIC and see how the various companies compare
I'm glad it was helpful, Kimm! Hopefully you find all economic moats and high ROICs in your analysis ;) Have a good weekend.
@@NathanWinklepleckCFA well I was doing great until I saw that AVGO was at 8.55… that sure gave me a pause
My highest ROIC was SPGI at 51.42… followed by TXN at 43.16…. My worst was NEE at 4.33 and ROP at 6.81
It might be helpful to look at multiple years. I’m not sure if you’re looking at just the last 12, but generally I think buffet would look at a five-year average or so.
Next era does a lot better because they have a super stable business and have quite a bit of leverage. So the returns on equity or more like 13%. Generally that much leverage might not be favorable, but they do have a very very very consistent business model so they can get away with it a little more than others could.
Hi Nathan , great video, you really adding value to the investors community. I am new subscriber (from yesterday). By the way . Can you share any website where I can find ROIC? (Besides Qf) . Thanks a lot and congrats for the high quality
Thanks, Jorge! you can find that on QuickFS. Net
Excellent analogy Nathan! Very informative video as always. Enjoyed watching 👍
Thanks, John! 👍
Is there potentially a video you could do that would educate us on how we would go about and do a return of capital investment for a company ourselves? I feel like yahoo finance has the data required but I am not sure what would be the best way to analyze the information.
Yeah, that would be great! I was planning to do a video like that soon.
Thank you, Nathan. Very well explained. I just don't know why VRSN stock price does not follow the stock's financials. Free Cash Flow has been going up. Net Income, Revenue, Net Profit Margin also been going up.
Also why Warren Buffett would hold AXP with such a low ROIC. Well it's not the first time he does NOT follow his own rules.
Awesome video Nathan! Very interesting analogy that made a lot of sense. Thank you for sharing your insight!
Thanks a lot, John! I appreciate you watching and leaving a comment. Have a great day!
What a lovely and interesting channel you have here! Wonderful explanation! You have a new subscriber 😉
Good points, with one erratum - it's the 1979 Berkshire letter to share holders, not the 1978.
Hi Nathan, only one word about the video: EXCELLENT !
Thanks, Mi!
very interesting way to look at stocks ..thanks for the insights!
You got it, shek! Thanks for the comment.
Great Explanation, I got most from this one video about investment. Thank YOU
Glad I could help, Michelle!
Thanks, Nathan. Is there a good ROIC screener out there?
Morningstar has one but it only has ROE. I'm actually not sure of any that have ROIC and are free. I use one from S&P Global, but let's just say it's pretty expensive for the retail investor... It's such a poorly followed metric that there doesn't seem to be much on it.
@@NathanWinklepleckCFA Thanks. Appreciate it.
Another great video. Glad you’re here!
Thanks, Jason!
Great video. I generally agree with paying attention to the ROIC stat but only a handful of companies maintain consistent 10+% ROIC year in and out. Even BRK.B hasnt had the greatest track record with it.
Thanks Nathan.
Is there a web site I can find ROIC data or calculate it myself?
You got it, Sam. You can find it on Morningstar or Quick FS.
@@NathanWinklepleckCFA Quick follow up question.
On the QuickFS site I can see "Return on Assets" and "Return on Equity". Just to be sure, the ROIC is the "Return on Assets" right?
@@apchioryalexander6839 No, it's not the same thing. ROE and ROIC and ROA are all different metrics.
@@NathanWinklepleckCFA Ok Thanks! I just realized that I was looking on a banking stock and it didn't had a ROIC metric.
Hi Nathan,
I'm a fan of your videos and the free audio book. I was wondering if you did a NFL draft pick for 2021. Mostly curious as to how the 32 companies have done 1 year later. Thanks and I look forward to more of your videos.
I'm not sure how they've done since then vs. market, but would be an interesting video. Maybe I'll do a recap. Thanks, Megan!
Seeking alpha only has a Return on Total Capital metric which I have checked is different from the ROIC Morningstar provides.
The thing is, does ROIC history matters? obviously if it does I would like to see an increase throughout the years no?
Also, if ROIC history does matter, where can I see it without dedicating my entire yearly dividend income to a Morningstar subscription?
Correct. I’d check out QuickFS to see if that meets your needs on the data. And everyone measures ROIC differently. I personally value consistency, but a rising ROIC would definitely be a good sign 👍
@@NathanWinklepleckCFA I found it, super helpful. Thank you very much.
Sure thing!
On of my Canadian holdings, Goeasy Ltd. has a ROIC of 16.2% which is quite healthy. I've usually used ROE to evaluate my positions. How I see a lot of value I'm using ROIC.
Great video. Thx. Questions: I looked the RIOC of various stocks and found a few that really surprised me: DDOG, CAN and VRSN. Not great companies compared to AAPL, SBUX or HP but with ROIC TTMs of over 100%!?!? What’s the deal? Do you need to weigh their ROIC against their ROEs?
High ROICs may indicate they have minimal assets, like a data/software company. Still impressive, but intellectual capital is not captured on balance sheet. VRSN is legendary. Buffett owns that one.
Great video. However rhe background music is, in my opinion, too loud so if you could lower it in future videos I'd be great
Now it makes sense why companies with low Return on invested capital do buybacks. The reason is due to it not going back into the business because the return would be bad and it would be better for them to simply buyback shares to in a sense do a burn like Shiba Inu since it cannot utilities that invested capital in a meaningful manner. It increases the proportion for the shareholders providing growth in a stagnant company.
Hey Nathan, I love the basketball analogy, Kawhi (fav player) is a perfect example haha...but then there are very few players like him in the league. Does the same scarcity of efficient players apply to companies with good/great ROIC in the S&P 500?
Thanks! I'm a fan of LeBron personally, but Kawhi is good too ;)
He said analysts should emphasize the "yearly changes" to the EPS. So, literally, he said to look at the EPS growth. At least in the quote at 4:38 ...
Another great video, Nathan. Thanks for posting.
Thanks, Rob!
Cool analogy, makes it easy to understand! Thanks
Thanks a lot! I’m glad it was helpful.
Thought-provoking video although us "non sporty" types had no idea what you were talking about for the first half :-). A quick lookup on Guru-Focus revealed that some of the putative darlings of investors e.g. Realty Income Corp (O) have ROIC of only .53. Thanks for bringing it to the notice of your subscribers. Appreciated.
You got it, Santinder! :D Yes, Realty Income isn't nearly as good as some people think. Then you throw on there that they issue equity and it's just not at all something I would want to invest in, but that's just me. (Everyone should decide for themselves, of course. ;)
Is ROI/ROIC an appropriate measure for banks? It seems like banks either are rarely to never good investments or ROI isn’t the best measure for them. Any pointers appreciated
Nope, it's not. Capital structure is an issue there. Use ROE or ROA.
🙏 thanks!
If Apple ROIC is 40% then how come it has a very slow revenue growth?
I must be missing something here. But, what’s the point if this is not reflected on Apple growth?
The key is what percentage are they reinvesting at 40%? If you look at combined buyback and dividends, not much. Still, it reflects a wide economic moat and despite the slow growth one that is going to generate free cash flows for investors with little relative investment.
@@NathanWinklepleckCFA 100% agree!!!
Is this the case for JD btw? I'm struggling to get to the bottom of it to be honest
Right or wrong, is the share price driven more by EPS or ROIC?
P/E more highly correlated with ROIC, but ultimately EPS gonna drive Price.
@@NathanWinklepleckCFA Thank you Nathan, I enjoy your analyses. I suspect your 1,000,000+100,000 example is too simplistic. What is the hundred thousand was needed to meet the 1 million machine more effective for example? Anyway I will keep looking and learning!
On the other end, a company investment of capital might only pay off after a few years and not necessarily within the same year or year +1 (ie: new factory, new medical research). Also a company seeing earnings grow, while only doing a very very low investment of capital can have a very high ROI, this ROI wouldn't be linked to capital invested (ie: price of goods grow while consumer base and product stay the same)
Great video. Very informative. Thanks for sharing.
Thanks, Bob
What is difference between ROIC and ROCE? Please make a video on calculating both and how it impacts companies.
ROCE excludes money not invested (ie: cash and marketable securities)
@@NathanWinklepleckCFA Thank you very much. But, please elaborate by making a video and telling all of us the respective formulae to calculate both ROCE and ROIC and which is better.
Good video idea. I’ll add to my lisr
Btw, I know you havent made ETFs videos for a while, but I think a lot of us can benefit from a BST and BSTZ review and personal thoughts video.
I’ll look into those. Thanks!
Great video!!!
Great explanation, I learn a lot thanks.
Thanks! I’m glad you learned something from the video.
Do all companies strive to be above 10roic or do utilities for example tend to be much lower just be the nature of their industry?
Not all companies look at ROIC, but they should. Utilities just tend to be lower because they are regulated monopolies.
Does the invested capital include operating expenses, servicing debt etc?
Invested capital does not. The “return” is usually calculated as EBIT, which does include operating expenses but adds back debt (since debt is included in the denominator)
I’m sold, but how do you find the return on invested capital?
There are several ways. You can find the data on MorningStar under operating performance or using quickFS
Very informative as always,
I have read from buffet that the return of the stock will match the ROIC over long periods of time,
But it’s not always the case right? Since some companies will be fairly valued/overvalued in term of price. For example, apple has ROIC of 40%, but this ratio is priced in, and it won’t deliver the same return over time.
My question is, when can I use ROIC in valuing a stock, and how do I know if this ratio is priced in or not?
Very perceptive of you; yes, the higher the ROIC the higher the P/B ratio will be. The returns will match the ROIC the longer you own it. In general; you could expect ROIC only if the price relative to invested capital was 1. In most cases, it would be much higher. I’d look at the current 40% ROIC as temporary since competition should erode it. The key is predicting how long ROIC is sustainable at high levels. If it stays at 40% for the next 20 years (unlikely) then the business will bail you out of a high price today. If it erodes back to 10%, then the current premium will look expensive. Buffett’s genius was buying high and sustainable ROICs that the market was pricing at sustainably low ROIC levels. Not many of those exist today in this low rate world.
Great analogy!
Thanks!
When modifying a Portfolio View on Morningstar, I can't find ROIC in the list of columns to add. Is ti there but with a different name? it is quite inconvenient to look at each and every stock, go to the Financials tab, and find the ROIC.
You can find average ROE, I believe; ROIC is missing. (Shocking how few people look at it that Morningstar doesn’t even include it!)
@@NathanWinklepleckCFA Can ROE be used to filter out those that would likely have poor ROIC? Is there correlation between ROE and ROIC?
@@Ciborium Yes, ROE is ROIC but with leverage taken into consideration. So a company leveraged 4 to 1 will show a 4x higher ROE than ROC.
ROIC is a efficiency ratio but it doesn't answer the most important question if the company is cheap or expensive but DCF or PE do (to the certain degree).
You're right that there is no valuation ratios here, which would've been a good idea. The problem is that I despise all the ratios commonly used on free stock screeners (like I was using). P/E is rubbish and shows no evidence of working any longer. DCF would be ideal, but it's wildly dependent on your inputs, so that's subjective and based on your views of the company and future growth. The best single metric I've seen is EV/EBIT. There is good research on that one. Thanks for the constructive criticism; I appreciate that.
ok great. where do i find this info and where should i put my next 1000 bucks? and go...
You can find it on MorningStar or quick FS. As far as what to do with the next thousand, I’m afraid I can’t help you there.
Are there certain sectors in which this doesn't apply ?
REITs and banks
Thanks!
Cool, today I learned something new!
I’m glad you found it helpful, Ivan!
Is there an ETF of the highest ROIC holdings?
Right now I'm invested in MTUM, SYLD, SCHD... Would be cool to add an ROIC ETF
QUAL is probably as close as I know.
capex is usually static, whilst profitability is dynamic. ie: you invest 100K and you make only an extra 2K per year, but that extra 100K investment may have enabled you to stay competitive in the market whilst had you NOT invested in the company, a competitor could have done so, taken market share and DROPPED your earnings by doing so.
.....shit ain't so straightforward when you think about the bigger picture.
Why is it cutoff at the end
Return on invested time…favorable
LOL 😂 Love it
Thank you
You’re welcome I’m glad you enjoyed the video.
Assume a company has a high ROIC and that it returns its earnings to shareholders as dividends. Such a company will have a stable (static) stock price and a stable (static) dividend yield. So, even though the company has a high ROIC, it's not necessarily a good investment. It becomes a good investment when it reinvests some of its earnings into its business. Assuming it continues the produce a high ROIC, its stock price (and its invested capital) will grow at a compound rate, which is what you want. So, it seems to me that a high ROIC is not necessarily a good basis for investing in a company. You need a high ROIC along with a compounding amount of invested capital. The ROIC need not increase. All that's needed is that it does not decrease as the company's invested capital grows at a compound rate.
thanks!
You’re welcome, Dexter!
I don't understand your example. How could a company earning $1million INCREASE earnings by 10% by investing $100k only earning 2%? They have to pay interest on that debt costing at least 2%? So the earnings would not increase at all, unless you are talking about EBITDA. If so, that is a problem with focusing on EBITDA. The conclusion is the same: this is not an attractive company. But companies with good ROTA will have good eps growth if the company has reinvestment opportunities, which shows that the two measures are related.
I think people who invested in a company with 2% ROIC because earnings go up and they hope eventually they can grow bigger.
I think it’s more that they didn’t pay attention to ROIC to start with. ;)
this is what's happening with Intel and AMD right now: AMD took the lead and marketshare from intel, so intel is HEAVILY investing in capex to be able to retain competitiveness and retake marketshare, but shareholders everywhere are FREAKING the fuck out because the financials look bad----intel spending a LOT whilst having a bad year = "intel making bad money choices" rather than "intel investing in future competitiveness and working towards retaking marketshare"
Ford is up more than 70 percent in 6 months since this video
Thanks
Music is so annoying!
Sorry
Stop with the piano, i didn't watch the video because the piano
Sorry!
Think brk.b is 55-60% aapl now...
Nope. 25%