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- Return on Invested Capital (ROIC) – 4 Reasons to Use ROIC to Pick Profitable Stocks
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## Return on Invested Capital (ROIC) – 4 Reasons to Use ROIC to Pick Profitable Stocks

Return on invested capital (ROIC) is one tool investors use to determine whether or not a company has a sustainable advantage over its competitors. Some investors call this sustainable competitive advantage a “moat.” Moat companies tend to dominate the industry niches in which they operate, and the stock market tends to reward investors in these companies with higher stock prices as they grow in their market niche.

Return on Invested Capital (ROIC) = Net Income After Taxes (NOPAT) / Capital Employed Return on invested capital is a good way for businesses that may be struggling because it measures how efficiently a business is using its existing cash to generate revenue. the profit it earns. If a company has a high return on invested capital, especially compared to its competitors, it is probably because the company has a more efficient way of producing its goods or services, or it can charge prices that allow it to make more profit. margin than its competitors.

Here are 4 reasons that make return on invested capital the metric you should use to screen out companies that can continue to deliver above-average growth:

1) Management Effectiveness – ROIC shows how well management is generating business profits compared to the amount of money they use to generate those profits

2) Clarifies the income statement – Instead of focusing solely on net income (the P/E ratio “E”), ROIC instead uses NOPAT, which removes (among other things) items such as investment income and interest expense, giving a much clearer picture of how how much profit the company actually makes as a result of its profit making

3) Using investment capital instead of just equity or assets (eg return on equity (ROE) or return on assets (ROA)), return on investment capital uses deployed equity AND debt capital and removes cash sitting in the bank. collecting interest on the account instead of generating income through the company’s operations

4) Companies with a high return on invested capital in their industry are generally leaders or emerging leaders in their market niche.

Using the ROIC formula above, you can prove what this article says by quickly visiting MSN Money and comparing the historical return on invested capital of Google and Yahoo (you probably used one of those search engines to find this article). If you look at the ROIC values of these two companies and look at their relative stock price performance, the results can be enlightening.

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