Return On Invested Capital, or ROIC in English, is used to measure a company's efficiency in converting capital into profits. You can judge a company's investment value by comparing the return on capital of different companies in the same industry or the same company in different periods. Return on capital reflects the ratio between a company's profits and the investment it has received, and its value represents the company's ability to convert the external investment it has received into profits. You can use return on capital to analyze a company's historical ROIC value to analyze the company's profitability, its ability to convert investments or loans into income, or estimate the possible rate of return on your investment based on the ROIC value; or analyze the ROIC values of different companies in the same industry to compare the operating capabilities of the target company in the same industry. When investors use the return on capital value for investment analysis, they can first analyze whether the company can steadily improve its ability to earn profits through external investment during its development process based on the historical ROIC value of the same company. A company with a steadily rising ROIC value often means that it is in a benign operating model, and the higher the probability and rate of return after investment are to obtain stable returns. Secondly, ROIC values will vary greatly depending on the operating background of different industries. According to the demand for capital and the speed of return generation in different industries, stock investor Buffett will divide companies into three categories to more accurately use ROIC values to analyze the company's profitability and investment value. Buffett divides companies into three categories: High ROI business with low capital requirements Some companies with low capital requirements, such as VISA, Facebook, etc., require low costs. After entering a healthy operation track, they can obtain very considerable and high returns. Therefore, the ROIC value of such companies is usually very high. For this type of company, it is necessary to use a higher ROIC value as the starting point for comparative analysis to determine its operational capability positioning in the industry. A business that requires capital to grow; generates adequate returns on that capital The operating model of most companies requires a certain amount of capital investment to obtain excellent returns, such as the retail giant Wal-Mart. The ROIC value of such companies is usually much lower than that of companies with low capital requirements. Therefore, when comparing its profitability, it must be compared with similar companies to obtain a more accurate investment value judgment. Businesses that need capital but have low returns Buffett cited American Airlines in the aviation industry and Tesla in the automobile manufacturing industry as examples of such companies. These companies are characterized by being capital-intensive and require a large amount of long-term investment to maintain operations, but the returns may not be sustainable. Therefore, the ROIC value of such companies is often very low, and investors need to consider carefully. Which industries are suitable for analyzing return on invested capital? Since the calculation of ROIC involves the income a company can earn and the external capital it requires, which comes from all debt and shareholders, almost any company can use ROIC to analyze its ability to use external capital to generate benefits. However, industries that use external capital as the main capital for company operations, such as manufacturing and service industries, are more suitable to use ROIC to analyze their return on capital. In the same industry, different companies will have large ROIC differences due to different operating capabilities, so that the investment value of different companies can be compared more clearly. Representative manufacturing companies include: Exxon, Chevron, Ford, etc. Representative companies in the service industry include: Cloud 9 Services, Streefair, Wonderment, etc. Some other industries, such as the basic materials industry, are easily affected by external factors, and the ROIC value is highly volatile. Therefore, ROIC can also be used as one of the main indicators for investment analysis. Representative companies in the basic materials industry include: Rio Tinto, Nucor, Air Products & Chemicals, etc. In some industries, such as industry, public utilities, and telecommunications, the ROIC difference between different companies will not be much different. Therefore, in comparison, it is more suitable to analyze the company's own operation and development by analyzing the ROIC value of the same company in different periods.
Representative companies in the industrial industry include: Honeywwll, UPS, Boeing, etc. Representative companies in the utility industry include: Pacific Gas & Electric, Southern California Edison, Florida Power & Light, etc. Representative companies in the telecommunications industry include: AT&T, Verizon, T-Mobile US, etc. What is the difference between ROIC and ROE, ROA, ROS? ROIC, ROE, ROA and ROS are ratios often used by investors when analyzing the investment value of a company. Their main differences are: ROIC return on invested capital ROE return on equity ROA return on assets Ratio Ratio of operating profit after tax to invested capital Net Profit to Shareholders' Equity Ratio Net profit to total assets ratio show A company's ability to convert all invested capital into profits A company's ability to convert shareholder capital into profits The profit generated by each asset of the company Return on capital by industry in the United States The following is a table of ROIC data for various industries and sub-industries in the United States as of January 2022: Industry return on invested capital Advertisement 50.20% Aerospace/Defense 14.76% air transport -19.81% clothing 20.35% cars and trucks 4.74% car parts 14.77% Bank (money center) -0.01% Bank (region) -0.08% Beverages (alcohol) 15.28% Drinks (soft) 27.30% broadcast 17.22% Brokerage and Investment Banking 0.37% building materials 30.44% business and consumer services 23.26% cable TV 12.77% Chemistry (Basic) 27.31% Chemical Engineering (diversified) 13.74% Chemistry (major) 15.02% Coal and related energy -4.04% computer services 21.41% Computers/Peripherals 44.93% building supplies 12.88% Diversification 21.45% Drugs (Biotechnology) 7.30% Drugs (Pharmaceuticals) 19.66% education 7.10% electronic equipment 22.78% Electronics (consumer and office) 18.32% Electronics (general) 17.59% Engineering/Architecture 15.99% entertainment 10.06% Environmental and waste services 25.56% Agriculture/Farming 13.48% financial services. (Non-banking and insurance) 0.59% food processing 19.54% food wholesaler 12.29% Furniture/Home Furnishings 24.76% Green and renewable energy 5.73% Health products 18.64% Healthcare support services 32.05% Healthcare Information and Technology 23.06% house construction 22.92% Hospital/Healthcare Facility 23.17% Hotel/Game -4.69% Household items 39.78% information services 29.04% Insurance (general) 12.97% Insurance (life) 6.49% Insurance (Proposal/Case) 17.38% Investment and Asset Management 9.72% machinery 27.22% Metals and Mining 36.12% Office equipment and services 13.47% Oil/Gas (Consolidated) 5.12% Oil/Gas (Production and Exploration) -1.54% Oil/Gas Distribution 6.81% Oilfield Services/Equipment. 2.82% packaging container 15.40% Paper/Forest Products 44.89% strength 6.06% precious metals 14.75% publishing and newspapers 15.77% REIT 2.75% Real Estate (Development) 1.29% Real Estate (General/Diversified) 5.01% Real Estate (Operations and Services) -2.80% 18.44% reinsurance 6.69% restaurant/restaurant 14.72% Retail (Automotive) 15.47% Retail (Construction Supplies) 54.62% Retail (Distributor) 16.27%
Retail (general) 20.88% Retail (Grocery and Food) 7.01% Retail (online) 12.18% Retail (dedicated line) 17.28% rubber tires 7.28% Semiconductor 21.70% Semiconductor equipment 37.24% shipbuilding and marine 15.01% 40.95% Software (Entertainment) 25.46% Software (Internet) 1.65% Software (systems and applications) 25.03% 37.25% Telecommunications (wireless) 5.18% Telecommunications. Equipment 26.84% Telecommunications. service 15.33% Tobacco 64.45% transportation 21.05% Transportation (Railway) 15.31% Trucking 5.76% Utilities (general) 5.91% Utilities (Water) 7.29% total market 8.61% Total market (excluding financials) 10.58% Data source As can be seen from the table, the return on invested capital varies greatly between different industries. For example, large service industries such as advertising and computer peripheral equipment services are less dependent on capital, so their ROIC values are higher among all industries. Capital-intensive industries such as the air transportation industry and hotel industry have very low ROIC values, or even negative values. In the same major industry, there will be significantly different ROIC values depending on the sub-category. For example, in the two sub-industries of retail construction materials and retail food, the ROIC values are 54.62% and 7.01% respectively, with a difference of nearly 50%. This is related to the different production and sales models in the two sub-industries. More investment guides What are Bollinger Bands and how do I use them? What is Moving Average (MA)? What is the Money Flow Index (MFI)? And How to use it? What is the Federal Reserve Balance Sheet? What are minority interests? How to handle the profits of subsidiaries? What is Shareholders’ Equity? Shareholders’ Equity What is the Price to Cash Ratio (P/CF)? How to calculate? What is Operating Expense OpEx? Operating Expenses What is Cost of Goods Sold (COGS)? How to calculate? What is a Company’s Preferred Stock?