Two Ways to Use the Retention Ratio Formula to Project Future Growth

Most companies find growth by retaining earnings (capital) in the business and reinvesting it for sustainable future returns. Using the retention ratio formula can help you project a company’s future growth potential by looking at how much the company can retain in the business. There are two main types of retention ratios which are used […]

What is a Company’s Optimal Capital Structure and What Influences It?

“The first question is, is when you have capital, is it better to keep it or return it to shareholders? It’s better to return it to shareholders when you cannot create more than a dollar of value with that capital. That’s test number one. And if you pass that threshold, that you think you can […]

ROIC vs ROCE in Simple Terms – Why It Matters

Both ROIC (Return on Invested Capital) and ROCE (Return on Capital Employed) are formulas trying to describe how efficiently a company invests its capital. The difference between ROIC vs ROCE is subtle but powerful—basically, one (ROCE) is a shortcut of the other (ROIC). Before diving deeper, here’s the simple cliff notes: ROCE = EBIT / […]

How an ROIC Tree Shows a Company’s Growth Drivers and Capital Efficiency

Corporate officers are in the business of allocating capital. The goal for each CEO is to return an attractive return on its capital. All companies create value for their company and shareholders when they earn a return above the opportunity for other capital allocations. One way to measure those returns is the metric ROIC, and […]

Investor’s Guide to Incremental Invested Capital (ROIIC)

Focusing on the returns on invested capital that a company produces helps us understand better how well a company sets itself up to grow. A company with strong returns on invested capital is the unicorn that we all look for, especially when they efficiently use that capital to grow over time. A great way to […]

Return on Capital Employed: Ratio for Profitability and Capital Efficiency

One of Terry Smith’s investing foundations’ main pillars is to invest in good companies that he defines by companies with high returns on capital employed. For those of you not familiar with Smith, he runs Fundsmith, whose returns have almost doubled the returns of the S&P 500 over the last decade. Smith’s Fundsmith has investments […]

ROIC Analysis: Value Destruction From Growth and Other Pitfalls

Something that might shock the average investor is that growth can actually lead to value destruction for a company, depending on how a company is achieving that growth. Using ROIC analysis and comparing it to a company’s cost of capital, we can quickly determine when that is happening and steer clear from these types of […]

WACC vs. ROIC: Is Shareholder Value Being Created or Destroyed?

Measuring a business’s economic moat is a challenge, but there is a comparison using several metrics that allow us to get an economic moat idea. That comparison is the grudge match of finance, WACC vs. ROIC. Warren Buffett speaks numerous times about his fondness for companies with economic moats. Many of his best investments, such […]

How to Calculate NOPLAT for Operating ROIC

Both NOPLAT and ROIC can be easily misinterpreted and misused in its applications to understanding a business. NOPLAT gets especially mishandled due to its more well known cousin, NOPAT. Most of the time these are interchangeable, but when they’re not, it can really lead to a distortion in calculating ROIC. What is NOPLAT? NOPLAT stands […]

How to Calculate Invested Capital for ROIC (the right way)

Do you know how to calculate Invested Capital the right way? Did you know there’s two different equations for the same Invested Capital formula, and they mean two different things? I’ve seen the words Invested Capital tossed around lightly many times online, and while the intentions are good, the execution is not. Oftentimes, I hear […]