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Consilient Observer
June 06, 2023

ROIC and the Investment Process

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June 06, 2023

ROIC and the Investment Process

Consilient Observer

ROIC and the Investment Process

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June 06, 2023


ROICs, How They Change, and Shareholder Returns

  • This report extends our analysis of the return on invested capital (ROIC) for public companies in the U.S. and updates the data to cover the years 1990 to 2022.
  • We examine the relationship between changes in ROIC and total shareholder returns (TSRs) and generally find that increases in ROIC are associated with attractive TSRs and decreases with poor TSRs.
  • We analyze the movement of companies from one quintile of ROIC to another and observe that those that meaningfully change their ranking often provide opportunity for outsized returns.
  • We quantify the rate of regression toward the mean for various sectors, which offers insight into why companies in certain sectors trade at higher valuations than those in other sectors.
  • Companies that delivered high and sustained ROICs exceeded their peers in both net operating profit after taxes (NOPAT) margin and invested capital turnover, but NOPAT margin was a significantly more important driver.
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Net Operating Profit After Tax (NOPAT) represents the hypothetical operating income of a company if its capital structure was all-equity. The NOPAT margin is the ratio between a company's net operating profit after tax (NOPAT) and revenue.

Total Shareholder Return (TSR) is the total amount of money that a shareholder would make from each individual stock.

Return On Invested Capital (ROIC) represents the rate of return a company makes on the cash it invests in its business.


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