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Return On Invested Capital (ROIC): Explanation & Examples

Return on invested capital (ROIC) is not only the most intuitive measure of corporate performance, but it is also
the best. It measures how much profit a company generates for every dollar invested in the company. It is the
true measure of a company’s cash on cash returns.
As we demonstrate in “ROIC: The Paradigm For Linking Corporate Performance To Valuation”, ROIC is the
primary driver of stock prices. Growth and duration of profit growth also help drive stock prices, but ROIC is, by
far, the most important driver because the market cares most about assigning value to the companies that
produce the most cash per capital invested in them. If the opposite were true, the market would quickly go
bankrupt. If you believe in any sort of efficiency in the stock market, ROIC is preeminent.
The formula (see Figure 1) for calculating ROIC is easy. The hard part is finding all the data, especially from the
footnotes and MD&A, required to get NOPAT and Invested Capital right. When we calculate ROIC, we make
numerous adjustments to close accounting loopholes and ensure apples-to-apples comparability across
thousands of companies.
Figure 1: How To Calculate ROIC
NOPAT/Invested Capital
Or
NOPAT/Revenue * Revenue/Invested Capital
Sources: New Constructs, LLC and company filings

“If ROIC Is So Great, Why Isn’t Everyone Using It?” The short answer is twofold: (1) most research comes from
sell side firms whose underwriting businesses are not aligned with exposing the true profitability of companies
and (2) it is a lot of work. As an independent firm, we have no conflicts with our clients. Our cutting-edge
technology to analyze footnotes enables us to scale our unique ROIC model building expertise.
We make it easy for the average investor to leverage the benefits of a high quality ROIC model. As our research
continues to proliferate, it gets harder for investors and executives to overlook its merits. Figure 2 shows the
companies with the highest and lowest ROIC out of 3000+ companies under coverage.
Figure 2: Companies With Best/Worst ROIC Over the Last 12 Months
Ticker Name ROIC Stock Rating
Highest Return On Invested Capital
AAPL Apple Inc. 256% Attractive
VEEV Veeva Systems 233% Dangerous
CHKP Check Point Software Technologies 180% Attractive
EDU New Oriental Education & Technology 175% Attractive
UBNT Ubiquiti Networks 166% Neutral
Lowest Return On Invested Capital
TXMD TherapeuticsMD -149% Very Dangerous
CRDS Crossroads Systems -174% Very Dangerous
ANTH Anthera Pharmaceuticals -183% Dangerous
MBVX MabVax Therapeutics -230% Very Dangerous
RSPI Respirerx Pharma -283% Dangerous
Sources: New Constructs, LLC and company filings. Only includes companies with positive NOPAT

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 DILIGENCE PAYS 4/8/16
Apple’s 254% ROIC is the highest of all companies under coverage. We’ve previously covered reasons we feel
such a high ROIC is not sustainable. In fact, since 2011, Apple’s ROIC has fallen from 339%. See Apple’s ROIC
each year dating back to 1998 here.
Veeva Systems (VEEV), Check Point Software Technologies (CHKP), New Oriental Education & Technology
(EDU), and Ubiquiti Networks (UBNT) earn the second through fifth highest ROIC. However, ROIC alone doesn’t
mean a company is a good investment. On one hand, Check Point Software was highlighted as a Long Idea in
June 2015. Meanwhile, Veeva Systems earns a Dangerous rating due to misleading earnings and a high
valuation. Here’s the Adjustment Page from our model, which shows exactly how we adjust Checkpoint’s GAAP
net income to calculate NOPAT, the numerator in our ROIC calculation. We also show how to convert total
assets to Invested Capital, the denominator in our ROIC calculation.
Respirerx Pharma (RSPI) earns the lowest ROIC of all companies under coverage. See RSPI’s ROIC for each
year since 1998 here. Over the past decade, RSPI has earned a positive ROIC only once, in 2010. MabVax
Therapeutics (MBVX), Anthera Pharmaceuticals (ANTH), Crossroads Systems (CRDS), and TherapeuticsMD
(TXMD) round out the five lowest ROICs across 3000+ companies under coverage. See the adjustments page
from our model of Crossroads Systems, where we show the adjustments to calculate NOPAT and invested
capital. See CRDS’s ROIC throughout the company’s history here.
Our models and calculations are 100% transparent because we want our clients to know how much work we do
to ensure we give them the best earnings quality and valuation models in the business.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector,
style, or theme.

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New Constructs® – Profile
How New Constructs Creates Value for Clients
We find it. You benefit. Cutting-edge technology enables us to scale our forensics accounting
expertise across 3000+ stocks. We shine a light in the dark corners of SEC filings so our clients
can make safer, more informed decisions.
Our stock rating methodology instantly informs you of the quality of the business and the fairness of
the stock’s valuation. We do the diligence on earnings quality and valuation so you don’t have to.

In-depth risk/reward analysis underpins our ratings. Our rating methodology grades every stock, ETF,
and mutual fund according to what we believe are the 5 most important criteria for assessing the
quality of an equity. Each grade reflects the balance of potential risk and reward of buying that
equity. Our analysis results in the 5 ratings described below. Very Attractive and
Attractive correspond to a "Buy" rating, Very Dangerous and Dangerous correspond to a "Sell"
rating, while Neutral corresponds to a "Hold" rating.

QUESTION: Why shouldn’t fund research be as good as stock research? Why should fund investors
rely on backward-looking price trends?
ANSWER: They should not.

Don’t judge a fund by its cover. Take a look inside at its holdings and understand the quality of
earnings and valuation of the stocks it holds. We enable you to choose the best fund based on its
stock-picking merits so you do not have to rely solely on backward-looking technical metrics.

The drivers of our forward-looking fund ratings are Portfolio Management (i.e. the aggregated ratings
of its holdings) and Total Annual Costs. The Total Annual Costs Rating (details here) captures the
all-in cost of being in a fund over a 3-year holding period, the average period for all fund investors.

Our Philosophy About Research

Accounting data is not designed for equity investors, but for debt investors. Accounting data must be
translated into economic earnings to understand the profitability and valuation relevant to equity
investors. Respected investors (e.g. Adam Smith, Warren Buffett and Ben Graham) have repeatedly
emphasized that accounting results should not be used to value stocks. Economic earnings are what
matter because they are:

1. Based on the complete set of financial information available.

2. Standard for all companies.
3. A more accurate representation of the true underlying cash flows of the business.

Additional Information
Incorporated in July 2002, New Constructs is an independent publisher of investment research that
provides clients with consulting and research services. We specialize in quality-of-earnings, forensic
accounting and discounted cash flow valuation analyses for all U.S. public companies. We translate
accounting data from 10Ks into economic financial statements, i.e. NOPAT, Invested Capital, and
WACC, to create economic earnings models, which are necessary to understand the true profitability
and valuation of companies. Visit the Free Archive to download samples of our research. New
Constructs is a BBB accredited business and a member of the Investorside Research Association.

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DISCLOSURES
New Constructs®, LLC (together with any subsidiaries and/or affiliates, “New Constructs”) is an independent organization with no
management ties to the companies it covers. None of the members of New Constructs’ management team or the management team of any
New Constructs’ affiliate holds a seat on the Board of Directors of any of the companies New Constructs covers. New Constructs does not
perform any investment or merchant banking functions and does not operate a trading desk.
New Constructs’ Stock Ownership Policy prevents any of its employees or managers from engaging in Insider Trading and restricts any
trading whereby an employee may exploit inside information regarding our stock research. In addition, employees and managers of the
company are bound by a code of ethics that restricts them from purchasing or selling a security that they know or should have known was
under consideration for inclusion in a New Constructs report nor may they purchase or sell a security for the first 15 days after New
Constructs issues a report on that security.

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