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.
Denne historien er fra January 20, 2020 - February 02, 2020-utgaven av Dalal Street Investment Journal.
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Denne historien er fra January 20, 2020 - February 02, 2020-utgaven av Dalal Street Investment Journal.
Start din 7-dagers gratis prøveperiode på Magzter GOLD for å få tilgang til tusenvis av utvalgte premiumhistorier og 9000+ magasiner og aviser.
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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
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U.S. Elections and China's Economy Hamper Commodities
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❝Technology is the new game-changer"
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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
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