! Making Sense of Profits Using Profitability Ratios


David Fox from NM posted over 5 years ago:

Then there is ROIC--Return on Invested Capital which Elizabeth Collins, in a 10-27-05 Morningstar Stock Strategist piece said, "My favorite financial ratio is--hands down--return on invested capital or ROIC. I think it is ten times better than [sic] ROA or ROE, and net profit margin doesn't even come close."

That's because, she says, [ROIC] "single-handedy provides a quantitative answer to the question, Does this company have an economic moat? .... [and] Given how great the ROIC metric is, I wish there was a stock screener that would help me find companies with high ROICs, but unfortunately one doesn't exist.....ROIC is a measure of how much cash a company gets back for each dollar it invests..."

She points out these limitations: (1)NET INCOME is used as numerator in both calculations, but, she says there can be many things going on "below the line" that make an unprofitable company appear profitable. (2)ROE:by carrying high debt & repurchasing shares, management can increase leverage & thus ROE,"But either can produce an unreasonably high ROE that doesn't accurately represent the company's profitability." (3)ROA:"...companies can carry lots of assets that have nothing to do with their operations."

And so on. But, AAII, how about creating the missing ROIC screen?

AAII: How about creating an ROIC screen?

Stephen Dyer from TX posted about 1 year ago:

Yes! Many excellent points made, and made with clarity.

I am recovering from lower back issues and looking for more ways to use AAII in my online courses. WITHIN the legal/ethical boundaries of course.

Great Stuff!
Stephen Douglas Dyer

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