3-Year Average Return on Invested Capital Metric

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.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

3-year average return on invested capital (seen in Figure 1) provides additional insights into a firm’s track record of prudent capital management. Companies with a high 3-year average ROIC consistently allocate capital to high return investments.

Properly calculating ROIC, the primary driver of stock prices, is key to measuring a firm’s ability to generate returns on the capital invested in its business. Our Robo-Analyst technology allows us to perform the diligence needed to calculate an accurate ROIC and comparable metrics, such as , 3-year average ROIC, ROGIC and GAAP-based ROIC.

Here are all the ideas presented at the 2020 Robin Hood Investors Conference

2020 Robin Hood Investors ConferenceAs usual, the Robin Hood Investors Conference has brought several new investment ideas from some of the top minds in the wealth management business. Investors heard from Sachem Head's Barnes Hauptfuhrer, One Tusk Investment Partners' Vivian Lau, Lone Pine's Mala Gaonkar, Lakewood Capital's Anthony Bozza, CAS Investment Partners' Clifford Sosin, Teca Capital's Fernando Vigil and Read More

Figure 1: How To Calculate 3-Year Average Return on Invested Capital

 3-Year Average NOPAT / 3-Year Average Invested Capital


3-Year Average NOPAT = Average NOPAT over trailing three years

3-Year Average Invested Capital= Average of the average invested capital over trailing three years

Sources: New Constructs, LLC

We make it easy for clients to leverage the benefits of a high quality ROIC model and see a clear picture of a firm’s true profitability. Figure 2 shows the Russell 1000 companies with the highest and lowest 3-year average ROICs.

Figure 2: Russell 1000 Companies With Highest/Lowest 3-Year Average ROIC Over Last Twelve Months

Sources:   New Constructs, LLC and company filings.

Apple’s 210% 3-year average ROIC is the highest of all Russell 1000 companies under coverage. See Apple’s 3-year average ROIC each year dating back to 2010 here.

Mastercard (MA), United Therapeutics (UTHR), Gilead Sciences (GILD), and Manhattan Associates (MANH) earn the second through fifth highest 3-year average ROIC. However, a high 3-year average ROIC alone doesn’t mean a company earns an Attractive-or-better rating. Apple and Mastercard both earn a Neutral rating. See Mastercard’s 3-year average ROIC each year dating back to 2010 here.

Nutanix Inc. (NTNX) earns the lowest 3-year average ROIC of all Russell 1000 companies under coverage. NTNX has earned a negative ROIC each year since going public in 2015. ServiceNow (NOW), ACADIA Pharmaceuticals (ACAD), Intercept Pharmaceuticals (ICPT), and Splunk Inc. (SPLK) round out the five lowest 3-year average ROIC’s across the Russell 1000.

ServiceNow, a previous Danger Zone pick, has failed to earn a positive ROIC or 3-year average ROIC in any year since going public in 2012. 3-year average ROIC has actually declined from -45% in 2014 to -55% over the last twelve months. ServiceNow’s strategy of revenue growth at all costs has been a clear destruction of shareholder value. See NOW’s 3-year average ROIC since 2014 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. Providing multiple versions of a given metric is part of this transparency. We customize calculations and metrics for clients as they see fit. We are not in the business of selling any one particular methodology. Our focus is on providing clients with a higher quality data set with which to perform calculations with integrity across thousands of stocks, ETFs, and mutual funds.

This article originally published on May 30, 2017.

Disclosure: David Trainer Kyle Guske II, and Kenneth James receive no compensation to write about any specific stock, style, or theme.