Return on invested capital, or ROIC for short, is just one of the many return on capital (ROC) metrics investors can use to determine the long-term future performance of a company. A high return on invested capital can be thought of as an 'engine' that drives company growth - as every pound of profit can be reinvested at this high rate of return. Indeed, ROIC has featured heavily in the writings of Warren Buffett, Joel Greenblatt, and even Ben Graham, to name a few. But there are, in reality, few companies that are able to achieve a strong, recurring ROIC, as a percentage of the overall stock universe.
Screening 8,351 of the world's largest stocks by market capitalization reveals that only 5,175, roughly 62%, have achieved an average ROIC of at least 3.1% over the past five years (similar to the average yield on the U.S. ten-year treasury over the same period). 35% of the group achieved a return of greater than 10% and only 13% managed to achieve an average ROIC of 25%, or greater, per annum over the past five years. The companies that make this top bracket are the likes of Philip Morris, Microsoft, GlaxoSmithKline and Roche, all of which have strong competitive advantages.
You may think that a ROIC of 25% is excessive. However, a lower figure is simply not going to compound owners' value at attractive rates. Over the past nine decades, the average annual return from stocks has been around 7%, so a ROIC of less than 10% implies that better returns can be found elsewhere. On the other hand, a ROIC in excess of 25%, is a veritable gold mine for investors.
Growth of £1,000 compounded at different rates:
| Year | 1 | 2 | 3 | 4 | 5 |
| Compounded at 3% p.a. | £1,030.00 | £1,060.90 | £1,092.73 | £1,125.51 | £1,159.27 |
| Compounded at 10% p.a. | £1,100.00 | £1,210.00 | £1,331.00 | £1,464.10 | £1,610.51 |
| Compounded at 15% p.a. | £1,150.00 | £1,322.50 | £1,520.88 | £1,749.01 | £2,011.36 |
| Compounded at 25% p.a. | £1,250.00 | £1,562.50 | £1,953.13 | £2,441.41 | £3,051.76 |
Multiple metrics
Return on Invested Capital can be explained as net income minus dividends divided by total capital. Total capital includes long-term debt, and common and preferred shares and gives a sense of how well a company is using its money to generate returns.
Another metric available through Stockopedia's screening tools is Cash Return On Invested…
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