When it comes to picking the best stocks, there are dozens – perhaps even hundreds – of metrics an investor can use for analysis. Many novice traders simply use the price-to-earnings ratio (PE) to compare stocks for their portfolios whereas some consider ROE to be a prime decision-making tool. Others go a step further and determine the free cash flow to a firm in order to find out how much money the company is generating. However, no discussion of important investment metrics would be complete without mentioning the Return on Capital (ROC). Every good business has to generate high returns on capital consistently because it is the fundamental driver of valuation.
High ROC over a period of time is a good indicator of identifying businesses with competitive advantages. There are several variants one can use to calculate ROC. In all cases, the measurement looks to capture the level of profits of a company expressed as a percentage of invested assets or capital. However, one of the most effective ways is to calculate the Return on Invested Capital (ROIC). Despite being one of the most reliable performance metrics for spotting quality investments, ROIC doesn’t get the same level of interest as compared to popular metrics like PE or ROE. This is simply because investors cannot pull off this metric from a balance sheet like they can with other popular ratios.
It requires some degree of understanding and a little calculation. However, for those eager to find out the true value a company is generating, calculating ROIC can be well worth the effort:
ROIC = NOPAT / Invested Capital
here, NOPAT = EBIT (1 – Tax Rate)
And, Invested Capital = Net Working Capital + Net PPE + Other Operating Assets – Excess Cash.
Diese Geschichte stammt aus der January 20, 2020 - February 02, 2020-Ausgabe von Dalal Street Investment Journal.
Starten Sie Ihre 7-tägige kostenlose Testversion von Magzter GOLD, um auf Tausende kuratierte Premium-Storys sowie über 8.000 Zeitschriften und Zeitungen zuzugreifen.
Bereits Abonnent ? Anmelden
Diese Geschichte stammt aus der January 20, 2020 - February 02, 2020-Ausgabe von Dalal Street Investment Journal.
Starten Sie Ihre 7-tägige kostenlose Testversion von Magzter GOLD, um auf Tausende kuratierte Premium-Storys sowie über 8.000 Zeitschriften und Zeitungen zuzugreifen.
Bereits Abonnent? Anmelden
How To Invest In An Ageing Bull Market
Bull rallies (periods when stock prices rise) and bear declines (periods when stock prices fall) are natural parts of stock market cycles, but they don't follow a fixed timeline.
Should You Entrust All Your Money To A Single AMC?
If you are a market participant, you have probably heard the quote 'don't put all your eggs in one basket', which suggests diversification. Investors often focus on diversifying across categories like large-cap, mid-cap and small-cap, but they may unintentionally overlook diversification across different AMCs. The question arises: is AMC-wise diversification really necessary? Rakesh Deshmukh takes a closer look at this scenario
Wild Swings Engulf Global Equities
U.S. stock markets experienced significant volatility. An early-week rally pushed the markets to new highs, but this momentum faded, primarily due to weaknesses in the tech sector. The major indices had a mixed finish with, S&P 500 and Nasdaq closed lower, while the Dow recorded a notable gain.
U.S. Elections and China's Economy Hamper Commodities
Commodity markets experienced selling pressure in the last fortnight, driven by uncertainties surrounding the upcoming U.S. presidential elections, concerns about the Chinese economy, and increased agricultural production in Brazil.
Wealth Building For Retirement Through Mutual Funds
Retirement is one of the most crucial and lifechanging phases. It marks a period where maintaining your lifestyle becomes paramount even though your regular income stops.
Mastering Investment with Information Ratio
Information Ratio helps in navigating the complexities of the investment landscape by assessing an active fund manager's performance. And though it has its limitations, it remains an essential part of the finance industry. The article explains what Information Ratio is and how investors can use it as another tool
Plan To Be Financially Independent
Each of us aspires to be financially independent as it ensures having enough resources to be self-sufficient and control our finances.
❝Technology is the new game-changer"
With a new breed of young investors entering the financial markets, it is the use of technology that is increasingly playing a major role in how investments are done and tracked. Anand Radhakrishnan, Managing Director, Sundaram Mutual Fund, shares his opinion about how this factor is turning into a significant tool and how it will shape the strategies of his company
What If Donald Trumps?
The potential election of Donald Trump as president in the U.S. carries significant implications for the Indian equity market. It could lead to changes in the global trade dynamics, in particular affecting the Indian IT sector while also raising inflation levels and leading to yet another revision in the visa programme for Indians who want to work in the US. The article takes a closer look at what may lie in store
Sectoral Gains Make A Mark
Benchmark indices continued their uptrend, reaching new record highs, although the pace has slowed as the broader markets faced selling pressures
