ValueROIC#26

Shareholder Yield

Measures the return a company earns on all capital invested in the business, whether from debt or equity. Joel Greenblatt uses ROIC in his Magic Formula. When ROIC exceeds the cost of capital, the company is creating value for shareholders.

Formula

NOPAT / Invested Capital x 100

Description

The most comprehensive profitability metric for value investors. It measures the return on all capital deployed in the business, regardless of whether it was financed by debt or equity. Joel Greenblatt uses ROIC as one of two key inputs in his Magic Formula.

Interpretation

ROIC consistently above the cost of capital (typically 8-10%) creates shareholder value. Above 12% is good, above 20% is exceptional. Greenblatt ranks stocks by ROIC and earnings yield, then buys the highest combined ranks.

Related Value Indicators

Price-to-Earnings Ratio TTM (P/E)P/E

Compares a stock's price to its earnings per share over the past 12 months. A lower P/E suggests you pay less for each dollar of profit the company generates.

Forward Price-to-Earnings (Forward P/E)

Compares today's stock price to next year's estimated earnings per share. It reflects what the market expects the company to earn, not what it has already reported.

Price-to-Book Ratio (P/B)P/B

Compares a stock's market price to its book value per share - the accounting value of the company's net assets. A ratio below 1.0 means the stock trades below its stated asset value.

Price-to-Sales Ratio (P/S)P/S

Compares a stock's price to its revenue per share. Useful for valuing companies that are not yet profitable, since revenue is harder to manipulate than earnings.

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