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Going deeper · 5 min read

ROIC: the fairest test of a business

Return on invested capital measures profit against everything funding the business: shareholders' money and borrowed money together.

That closes the loophole in ROE. A company can't look brilliant simply by taking on debt, because the debt is counted in the denominator.

Consistently high ROIC — mid-teens and above, for years — is the strongest single sign of a durable advantage, because it means competitors haven't been able to compete the returns away.

Remember

High ROIC for many years is the closest thing to proof of a moat.

See a real example

Compare Visa, Coca-Cola and General Motors

Which one earns most on the capital it employs?

What this shows

A payments network needs almost no capital to grow. A carmaker needs factories for every extra sale. The returns show it.

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