Best-in-class data and analytics are the cornerstone of our value proposition to clients.
In a new white paper, “Getting ROIC right: how an accurate view of ROIC can drive improved shareholder value”, E&Y demonstrates the superiority of our data, analytics and the importance of getting ROIC right.
Read the Ernst & Young White Paper
Every month and quarter, multiple reports on average hedge fund returns are released from several sources. However, it can be difficult to sift through the many returns to uncover the most consistent hedge funds. The good news is that Eric Uhlfelder recently released his "2022 Survey of the Top 50 Hedge Funds," which ranks the Read More
Through detailed examples, Ernst & Young proves how our Robo-Analyst technology, accounting adjustments, and calculation of ROIC create a material difference in our fundamental research versus the industry. Appendices in the white paper show how other major firms’ ROICs are way off target and lack the diligence we provide.
Real World Implications to Getting ROIC Right: Better Investments
Our diligent approach to calculating ROIC has practical, real-world implications for the investment decision making process. We’ve previously analyzed how optimizing ROIC could impact valuations, including case studies on Oracle (ORCL), American Express (AXP), and Morgan Stanley (MS). We argued that each of these firms were undervalued and that by aligning corporate strategy and incentive compensation with ROIC, each firm could substantially boost its market cap. Since then, each of these stocks have outperformed the S&P 500 and their valuations more closely align with what one would expect based on the firms’ ROICs.
More recently, we highlighted how our forensic accounting and ROIC calculation empowers investors to identify alpha-generating investment ideas. In the article “Alpha-generating Forensic Accounting Examples”, we identified five long ideas and three Danger Zone picks where our research deviated from traditional approaches. For example, NVIDIA Corporation (NVDA) was featured as a Long Idea in September 2015. Our research revealed that NVDA’s true ROIC, as well as its rate of change, was significantly understated by GAAP-based ROIC. During the subsequent 237-day holding period, NVDA rose 86% compared to just 6% for the S&P 500.
How to Get ROIC Right
We’ve long argued that return on invested capital is not only the most intuitive measure of corporate performance, but it is also the best. However, the benefits of a focus on ROIC are only realized if that ROIC is accurate. Getting ROIC right, which requires adjustments for numerous accounting loopholes, is key to effectively measuring corporate performance. Ernst & Young’s white paper provides empirical evidence that our diligent approach helps provide the best fundamental research.
At the same time, we want investors to know just how much work goes into getting ROIC right. The required diligence shouldn’t be hidden inside a “black-box.” As Ernst & Young notes, “The other advantage of New Constructs is the transparency in disclosing calculations and all the data behind them. It is hard to determine the calculations at a granular level from the reports of many data providers.”
To that end, we’re 100% transparent about the adjustments and calculations we make in regards to after-tax profit (NOPAT), invested capital, ROIC, and other metrics such as free cash flow and economic earnings.
Click here to learn how we calculate ROIC.
For more information, see below for insights into the importance of getting ROIC right.
- If ROIC is So Great, They Why Doesn’t Everyone Use It?
- ROIC: The Paradigm for Linking Corporate Performance to Valuation
- Make ROIC Great Again
- Bad ROIC Drives Bad Valuation
- Case Studies on Importance of ROIC
This article originally published on September 22, 2017.
Disclosure: David Trainer, Kyle Guske II, and Kenneth James receive no compensation to write about any specific stock, style, or theme.
Article by Kyle Guske II, New Constructs