Return on Invested Capital: One Metric To Rule Them All
If I were only able to analyze a single metric before investing in a company it would be ROIC (Return on Invested Capital). Fundamentally, a company creates value by taking capital from investors (both debt and equity) to generate cash flows in the future. A company only creates value to the extent that the return (ROIC) it generates is above its cost of capital (WACC), which we use to discount the future cash flows. The higher a company’s ROIC the greater the return it generates and ultimately the higher the cash flows it produces. Thus, the combination of growth and ROIC drives value creatio...