What is Return On Invested Capital?
Return on Invested Capital (ROIC) in basic terms is the amount of profit that a company earns for every $1.00 of capital invested into the business.
Some analysts may substitute “growth rate” for ROIC in some instances.
How Do I calculate ROIC?
Return on invested capital is calculated by dividing the organization’s net income by the total of the shareholder’s equity and the outstanding debt.
Net Income/ Shareholder’s equity + Outstanding debt
How Do I Use Return on Invested Capital To Value A Stock?
In very simple terms, the ROIC should be compared against the company’s Price to Earnings ratio (P/E).
If the Return on Invested Capital is greater than the Price to Earnings Ratio, the stock would be considered to be undervalued and would be a value buy.
ROIC > P/E = Undervalued Stock
*This is a very simplified version of the metric, but could be used with additional data in developing an investing strategy and stock screen that works for your goals!