Tag: Learning

Dividend Yield

A popular yield based measure used to value stocks is the dividend yield. It allows investors to compare the latest dividend they received with the current market value of the share as an indicator of the return they are earning on their shares. Note, though, that the current market share price may bear little resemblance to the price that an investor paid for their shares.

Dividend Yield Formula

For example, if two companies both pay annual dividends of Rs.10 per share, but company A’s stock is trading at Rs.200 while company B’s stock is trading at Rs.400, then company A has a dividend yield of 5% while company B is only providing an yield of 2.5%. In this case, if we assume all other factors are equivalent, investors looking to supplement their income would likely prefer company A’s stock over that of company B.

Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower yield. Many fast growing companies do not have a dividend yield at all because they do not pay out dividends as they reinvest all the cash in expanding the business.

What to look for while analysing a stock’s dividend yield

A high dividend yield may be an indication of a stock’s current attractiveness. However this can be misleading, if not sustained. Look at the dividend paying history of the company of last 5 years. A track record of maintaining and/or increasing dividends per share over the years is one indication of sustainability of dividends. A consistent dividend payout ratio for a firm with stable growth offers better clues towards sustainability of dividends.

You may also like to learn more on yield-based and other valuation measures, as below. 

PE Ratio

Now we come to the most popular valuation measure- the Price to earnings ratio or the PE ratio, which can take you pretty far as long as you are aware of its limitations. The nice thing about P/E is that accounting earnings are a much better proxy for cash flow than sales, and they are more up-to-date than book value. Moreover earnings per share results (and estimates) are easily available from just about any financial data source imaginable, so it’s an easy ratio to calculate.

Price to Earnings Formula

You can also compare a stocks P/E to the average P/E of the entire market. However the same limitations of industry comparisons apply to this process as well. The stock you are investigating might be growing faster (or slower) than the average stock, or it might be riskier (or less risky). In general, comparing a company’s P/E with industry peers or with the market has some value, but these aren’t approaches that you should rely on to make a final buy or sell decision.

However comparing a stock’s current P/E with its historical Price to earnings ratios can be useful, especially for stable firms that haven’t undergone major shifts in their business. If you see a solid company that’s growing at roughly the same rate with roughly the same business prospects as in the past, but it’s trading at a lower P/E than its long-term average, you should start getting interested. It’s entirely possible that the company’s risk level or business outlook has changed, in which case a lower P/E is warranted, but it’s also possible that the market is simply pricing the shares at an irrationally low level.

This method works generally with more stable, established firms than with young companies with more uncertain business prospects. Firms that are growing rapidly are changing a great deal from year to year, which means their current P/Es are less comparable to their historical P/Es.

P/E drawbacks

Relative P/Es have one huge drawback. A PE ratio of 12, for example, is neither good nor bad in a vacuum. Using PE ratios only on a relative basis means that your analysis can be skewed by the benchmark you are using. (peer, industry, market).

So, let’s try to look at the PE ratio on an absolute level. What factors would cause a firm to deserve a higher PE ratio? Because risk, growth, and capital needs are all fundamental determinants of a stock’s PE ratio, higher growth firms should have higher PE ratios, higher risk firms should have lower P/E, and firms with higher capital needs should have lower P/E. We can see why this is true, intuitively.

Firms that have to shovel in large amounts of capital to generate their earnings run the risk of needing to tap additional funding, either through debt (which increases the risk level of the company) or through additional equity offerings (which may dilute the value of current shareholders’ stake). Either way, its rational to pay less for firms with high reinvestment needs because each dollar of earnings requires more of shareholders’ capital to produce it.

Meanwhile, a firm that’s expected to grow quickly will likely have a larger stream of future cash flows than one that’s growing slowly, so all else equal, it’s rational to pay more for the shares (thus the higher Price to earnings ratio). On the flip side, a firm that’s riskier –maybe it has high debt, maybe it’s highly cyclical, or maybe it’s still developing its first product –has a good chance of having lower future cash flows than we originally expected, so it’s rational to pay less for the stock.

When you are using the Price to earnings ratio, remember that firms with an abundance of free cash flow are likely to have low reinvestment needs, which means that a reasonable PE ratio will be somewhat higher than for a run-of-the mill company. The same goes for firms with higher growth rates, as long as that growth isn’t being generated using too much risk.

Some other aspects that can distort PE ratios

Has the firm sold a Business or an Asset recently?

If a firm has recently sold off a business or perhaps a stake in another firm, it’s going to have artificially inflated earnings, and thus a lower P/E. Because you don’t want to value the firm base don one-time gains such as this, you need to strip out the proceeds from the sale before calculating the P/E.

Has the firm taken a big charge recently?

If a firm is restructuring or closing down plants, earnings could be artificially depressed, which would push the P/E up. For valuation purposes, its useful to add back the charge to get a sense of the firm’s normalized P/E.

Is the firm cyclical?

Firms that go through boom and bust cycles –commodity companies, auto manufacturers are good examples –require a bit more care. Although you will typically think of a firm with a very low trailing P/E as cheap, this is precisely the wrong time to buy a cyclical firm because it means earnings have been very high in the recent past, which in turn means they are likely to fall off soon.

Does the firm Capitalise or Expense its Cash flow generating assets?

A firm that makes money by inventing new products –drug firms are the classic example- has to expense all of its spending on research and development every year. Arguably, it’s that spending on R&D that’s really creating value for shareholders. Therefore, the firm that expenses assets will have lower earnings –and thus a higher P/E- in any given year than a firm that capitalizes assets. On the other hand, a firm that makes money by building factories and making products gets to spread the expense over many years by depreciating them bit by bit.

You may also like to learn more on other valuation measures, as below.

Quick Ratio

The Quick Ratio is a more conservative test of a company’s liquidity, than the Current Ratio We have learnt that a current ratio of 1.5 or more means the firm should be able to meet operating needs without much trouble. Unfortunately, some current assets – such as inventories – may be worth less than their value on the balance sheet. (Imagine trying to sell old PCs or last year’s fashions to generate cash – you would be unlikely to receive anything close to what you paid for them.) Current assets less inventories, divided by liabilities equals Quick Ratio.

Quick Ratio = (Current assets – Inventories)/Liabilities

In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company’s short-term financial strength. By taking inventories out of the equation, Quick Ratio lets us find out if a company has sufficient liquid assets to meet its short-term operating needs. It is especially useful for manufacturing firms and for retailers because both of these types of firms tend to have a lot of their cash tied up in inventories.

Calculating Quick Ratio

Quick Ratio is simply calculated by subtracting Inventories from Current Assets and dividing the result by Current Liabilities. Inventories, Current Assets and Current Laibilities can be found in the Balance Sheet filed in the firm’s Annual Reports. Annual Reports can usually be found at the firm’s website or from SEBI EDIFAR database. Current Assets are those likely to be used up or converted into cash within one business cycle, usually defined as one year. Liabilities, similarly are those that have to be paid within a period of one year. There are several types of inventories, including raw materials that have not yet been made into a finished product, partially finished products, spare parts and finished products that have not yet been sold.

Rough benchmarks for analysing a stock’s Quick Ratio

You may also like to learn more on other financial strength measures, as below.

Times Interest Earned

Times Interest Earned is also known as “Interest Coverage” ratio. Look up pretax earnings, and add back interest expense- this gives earnings before interest and taxes (EBIT). Divide EBIT by interest expense, and you will know how many times the company could have paid the interest expense on its debt. The more times the company can pay its interest expense, the less likely that it will run into difficulty if earnings should fall unexpectedly.

Times Interest Earned = Profit before Interest & Taxes (PBIT)/Interest Expense

Calculating Times Interest Earned

Times Interest Earned is simply calculated by adding Profit Before Tax (PBT) and Interest charges and  dividing the result by Interest charges. Both Profit before Tax and Interest charges can be taken from the Profit and Loss Statement from the firm’s Annual Reports. Annual Reports can usually be found at the firm’s website or from SEBI EDIFAR database. Interest charges includes interest cost for the debt carried by a company and other charges such as financial transaction fees.

Rough benchmarks for analysing a firm’s Interest Coverage

It is tough to say how low this metric can go before you should be concerned -but higher is definitely better. You want to see higher Interest coverage for a company with a more volatile business than for a firm in a more stable industry. Be sure to look at the trend in Interest coverage over time as well. Calculate the ratio for the past 5 years, and you will be able to see the company is becoming riskier -Interest coverage is falling – or, whether its financial health is improving.

You may also like to learn more on other financial strength measures, as below.

Current Ratio

The current ratio simply tells you how much liquidity a firm has – in other words, how much cash it could raise if it absolutely had to pay off its liabilities all at once. A low ratio means the company may not be able to source enough cash to meet near-term liabilities, which would force it to seek outside financing or to divert operating income to pay off those liabilities.

Current Ratio = Current Assets/Current Liabilities

Calculating Current Ratio

Current Ratio is simply calculated by dividing Current Assets divided by Current Liabilities. Both Current Assets and Current Laibilities can be found in the Balance Sheet filed in the firm’s Annual Reports. Annual Reports can usually be found at the firm’s website or from SEBI EDIFAR database. Current Assets are those likely to be used up or converted into cash within one business cycle, usually defined as one year. Liabilities, similarly are those that have to be paid within a period of one year.

Rough benchmarks for evaluating a stock’s Current Ratio

As a very general rule, a current ratio of 1.5 or more means the firm should be able to meet operating needs without much trouble. However when you find a company with current ratios of 3 or 4, you may want to be concerned. A number this high might also mean that management has so much cash on hand, they may be doing a poor job of investing it. It is always useful to compare companies within the same industry therefore, to get a better picture.

Unfortunately, some current assets – such as Inventories – may be worth less than their value on the Balance Sheet. (Imagine trying to sell old PCs or last year’s fashions to generate cash – you would be unlikely to receive anything close to what you paid for them).

If you see ratios around or below 1, should only be for companies those have inventories that can immediately be converted into cash (e.g. McDonalds). If this is not the case and a company’s number is low, that would be cause for concern.

Because of the general illiquid nature of inventories, there’s an even more conservative test of a company’s liquidity, the Quick Ratio

You may also like to learn more on other financial strength measures, as below.

Debt to Equity ratio

Debt to Equity ratio is just what it sounds like – long-term debt divided by Shareholders’ Equity. It’s a little like the financial leverage ratio, except that it is more narrowly focused on how much long-term debt the firm has per Rupee of Equity.

Debt to Equity = Long-Term Debt/Shareholders’ Equity

A high debt equity ratio for a firm indicates it has been aggressively financing its growth with debt. Due to the the additional interest expenses that have to be borne by the firm, this can result in volatile earnings.

A firm could potentially generate more earnings If a lot of debt is used to finance increased operations (high debt to equity) than it would have if it did not have access to this external financing. Shareholders would benefit if this resulted in increased earnings by an amount greater than the debt cost (interest). However, the cost of this debt financing may become too much for the company to handle, especially if earnings are cyclical and volatile, and outweigh the return that the company generates on the debt.

The debt equity ratio also varies depending on the industry in which a firm operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt equity ratio above 2, while software companies usually have a debt equity ratio of under 0.5.

Calculating Debt to Equity

Debt to Equity is simply calculated by dividing Total Debt (long-term debt is usually not reported separately in Annual Reports of Indian companies) divided by Shareholders’ Equity. Both Total Debt  (sum up secured and unsecured loans) and Shareholders Equity can be found in the Balance Sheet filed in the firm’s Annual Reports. Annual Reports can usually be found at the firm’s website or from SEBI EDIFAR database. Shareholders Equity is simply the difference between Total Assets and Total Liabilities – the assets that the business has generated.

Rough benchmarks for analysing a stock’s Debt to Equity

Financial Leverage

A common measure of leverage is simply the Financial Leverage ratio.

Financial Leverage = Assets /Shareholders’ Equity

Think of it like a Mortgage – a homebuyer who puts Rs. 200,000 down on a Rs. 1,000,000 house has a financial leverage ratio of 5. For every Rupee in Equity, the buyer has Rs. 5 in assets.

The same holds true for companies. In 2008, a retailer like Trent has a financial leverage ratio of 2.1, meaning that for every Rupee in equity, the firm has Rs. 2.1 in total assets. (It borrowed the other Rs. 1.1.)

Financial Leverage is something you need to watch carefully. As with any kind of debt, a judicious amount can boost returns, but too much can lead to disaster. Look at the kind of business a firm is in. If it’s fairly steady, a company can probably take on large amounts of debt without too much risk because there’s only a small chance of the business falling off a cliff and the company being caught short when bondholders demand their interest payments. On the flip side, be very wary of a high finacial leverage ratio if a company’s business is cyclical or volatile. Because interest payments are fixed, the company has to pay them whether business is good or bad.

Calculating Financial Leverage

Return on Equity is simply calculated by dividing Total Assets by Shareholders’ Equity. Both Total Assets and Shareholders Equity can be found in the Balance Sheet filed in the firm’s Annual Reports. Annual Reports can usually be found at the firm’s website or from SEBI EDIFAR database. Shareholders Equity is simply the difference between Total Assets and Total Liabilities – the assets that the business has generated. Shareholder equity is an accounting term that represents the assets created by the retained earnings of the business and the paid-in capital of the owners. Total Assets is simply all the property owned by a company. Total assets include current assets; fixed assets such as buildings, plant and machinery, and other assets such as licenses and goodwill.

Rough benchmarks for analysing a firm’s Financial Leverage

A financial leverage ratio of 2.1 is fairly conservative, even for a fast growing retailer. Its when we see ratios of 4, 5 or more that companies start to get really risky.

However, financial firms and banks have a much larger asset base relative to equity. The average bank has a financial leverage ratio in the range of 12 to 1 or so, as compared to 2-to-1 or 3-to-1 for the average company.

You may also like to learn more on other financial strength measures, as below. 

Intrinsic Value – What a stock is worth?

Without knowing what a stock is worth- in other words its Intrinsic Value- how can you know how much you should pay for it? Stocks should be purchased because they are trading at some discount to their intrinsic value, not simply because they are priced at a higher or lower point than similar companies.

The big drawback of the ratios discussed in the Stock Valuation framework is that they are all based on price – they compare what investors are currently paying for one stock to what they are paying for another stock. Ratios do not, however, tell you anything about value, which is what a stock is actually worth. Comparing ratios across companies and across time can help us understand whether our valuation estimate is close to or far from the mark, but estimating the intrinsic value of a company gives us a better target.

Pat Dorsey, Director of Stock Analysis, Morningstar Inc. in his very useful book – The 5 Rules for Successful Stock Investing – tells us how we can go about calculating what a stock is really worth- in other words, its Intrinsic Value. His writings are the primary source for this article.

Having an intrinsic value estimate keeps you focused on the value of the business, rather than a piece of the stock – and that’s what you want because, as an investor, you are buying a small piece of a business. Intrinsic valuation also forces you to think about the cash flows that a business is generating today and the cash it could generate in the future, as well as the returns on the capital that the firm creates. It makes you ask yourself, “If I could buy the whole company, what would I pay?

Second, having an intrinsic value gives you a stronger basis for making investment decisions. Without looking at the true determinants of value, such as cash flow and return on capital, we have no way of assessing whether a P/E of, for example 15 or 20 is too low, too high, or right on target. After all, the company with the P/E of 20 might have much lower capital needs and a less risky business than the company with the P/E of 15, in which case it might actually be the better investment.

Cash Flow, Present Value, and Discount Rates

What is a stock worth? Economists Irving Fisher and John Burr Williams answered this question for us more than 60 years ago. The value of a stock is equal to the present value of its future cash flows. No more and no less.

Companies create economic value by investing capital and generating a return. Some of that return pays operating expenses, some get re-invested in the business, and the rest is free cash flow. Remember we care about the free cash flow because that’s the amount of money that could be taken out of the business each year without harming its operations. A firm could use free cash flow to benefit shareholders in a number of ways. It can pay a dividend, which essentially converts a portion of each investor’s interest in the firm to cash. It can buy back stock, which reduces the number of shares outstanding and thus increases the percentage ownership of each shareholder. Or, the firm can retain the free cash flow and re-invest it in the business.

These free cash flows are what give the firm its investment value. A present value calculation simply adjusts those future cash flows to reflect the fact that money we plan to receive in the future is worth less than money we receive today.

Why are future cash flows worth less than the current ones? First, money that we receive today can be invested to generate some kind of return, whereas we cant invest future cash flows until we receive them. This is the time value of money. Second, there is a chance that we may never receive those future cash flows, and we need to be compensated for that risk, called the risk premium.

The time value of money is essentially the opportunity cost of receiving money in the future versus receiving it today, and is often represented by the interest rates being paid on government bonds. Its pretty certain that the government will be around to pay us our interest in a few years.

Of course, not many cash flows are as certain as those from the government, so we need to take an additional premium to compensate us for the risk that we may never receive the money we have been promised. Add the government bond rate to the risk premium, and we have what’s known as a discount rate.

Now you can start to see why stocks with stable, predictable earnings often have such high valuations – investors discount their future cash flows at a lower rate, because they believe that there’s a lower risk attached to the likelihood that those future cash flows will actually show up. Conversely a business with an extremely uncertain future should logically have a lower valuation because there is a substantial risk that the potential future cash flows will never materialise.

You can see why a rational investor should be willing to pay more for a company that’s profitable now relative to one that promises profitability only at some point in the future. Not only does the latter carry a higher risk (and thus a higher discount rate), but the promised cash flows won’t arrive until some years in the future, diminishing their value still further.

Changing discount rates and the timing of cash flows can have a telling effect on present value. In all three examples, below -StableCorp, CycliCorp, and RiskCorp -the sum of the undiscounted cash flows is about $32000.

However, the value of the discounted cash flows is quite different from company to company. In present value terms, CycliCorp is worth about $2700 less than StableCorp. That’s because StableCorp is more predictable, which means that investors’ discount rate isn’t high. CycliCorp’s cash flow increases by 20 percent some years and shrinks in some years, so investors perceive it as a riskier investment and use a higher discount rate when they are valuing its shares. As a result the present value of the discounted cash flows is lower.

The difference in the present value of the cash flows is even more acute when you look at RiskCorp, which is worth almost $8300 less than StableCorp. Not only are the bulk of RiskCorp’s cash flows far off in the future, bu also, we are less certain that they will come to pass, so we assign an even higher discount rate.

This is the basic principle behind a discounted cash flow model. Value is determined by the amount, timing, and riskiness of a firm’s future cash flows, and these are the three items you should always be thinking about when deciding how much to pay for a stock. That’s all it really boils down to.

Calculating Present Value

To find the present value of a $100 future cash flow, divide that future cash flow by 1.0 plus the discount rate. Using a 10% discount rate, for example, a cash flow of $100 one year in teh future is worth $100/1.10. or $90.91. A $100 cash flow two years in the future is worth $100/(1.10×1.10), or $82.64. In other words, $82.64 invested at 10% becomes $90.91 in a year and $100 in 2 years. Discount rates are really just interest rates that go backwards through time instead of forwards.

Generalising the previous formula, if we represent the discount rate as R, the present value of a future cash flow (CF) in year N equals

Fun with discount rates

Now that we have the formula down, we need to figure out what factors determine discount rates for use in Intrinsic Value calculations. How do we know whether to use 7 percent or 10 percent?

Size

Financial Leverage

Cyclicality

Management/Corporate Governance

Economic Moat

Complexity

How should you incorporate all of these risk factors into a discount rate? There is no right answer.

Discount rates for the Indian market context

Calculating Perpetuity Values

We have cash flow estimates, and we have a discount rate. We need one more element called a perpetuity value. We need a perpetuity because it’s not feasible to project a company’s future cash flows out to infinity, year-by-year, and because companies have theoritically finite lives.

The result of this calculation than must be discounted back to present, using the method discussed for calculating present value. For example, suppose we are using a 10-year DCF model for a company with an 11 percent discount rate. We estimate that the company’s cash flow in year 10 will be $1 billion and its cash flow will grow at a steady 3 percent annual rate after that. (Three percent is generally a good number to use as your long-run growth rate because it’s roughly the U.S. gross domestic product [GDP] growth. If you are valuing a firm in a declining industry, you might use 2 percent).

where n is the number of years in the future, CFn is the cash flow in year n, and R is the discount rate. Plugging these numbers, N = 10, CFn = $12.88 billion, R= 0.11

Calculating Intrinsic Value

Now all that we need to do is add this discounted perpetuity value to the discounted value of our estimated cash flows in years 1 through 10, and divide by the number of shares outstanding.

 
That was a brief outline of the process. You can follow along by matching the following steps:1. Estimate free cash flows for the next 4 quarters. This amount will depend on all of the factors discussed earlier -how fast the company is growing, the strength of its competitors, its capital needs, and so on. Using Clorox as an example, our first step is to see how fast free cash flow has grown over the past decade, which turns out to be 9% when we do the math. We could just increase the $600 million in free cash flow that Clorox generated in 2003 by 9 percent, but that would assume the future would be as rosy as in the past. Mega retailers like Wal-Mart -which now accounts for almost a quarter of Clorox sales -has hurt the bargaining power of consumer-product firms. So, let’s be conservative and assume free cash flow increases by only 5 percent over the last year, which would work out to $630 million.

2. Estimate how fast you think free cash flow will grow over the next 5 to 10 years. Remember, only firms with very strong competitive advantages and low capital needs are able to sustain above-average growth rates for very long. If the firm is cyclical don’t forget to throw in some bad years. We won’t do this for Clorox because selling bleach and Glad bags is a very stable business. We will however be conservative on our growth rate because of the “Wal-Mart factor”, and will assume free cash flow increases at 5 percent annually over the next decade.

3. Estimate a discount rate. Financially Clorox is rock-solid, with little debt, tons of free cash flow, and a non-cyclical business. So we will use 9% for our discount rate, which is meaningfully lower than the 10.5 percent average we discussed earlier. Clorox, is a predictable company, after all.

4. Estimate a long-run growth rate. Because people will still need bleach and trash bags in the future, and its a good bet that Clorox will continue to get a piece of that market, we can use the long-run GDP average of 3 percent.

5. That’s it! We discount the first 10 years of cash flows, add that value to the present value of the perpetuity, and divide by the shares outstanding.

This is a very simple DCF model. The one used at Morningstar has about a dozen excel tabs, adjusts for complicated items such as pensions and operating leases, and explicitly models competitive advantage periods, among many other things. But a model doesn’t need to be super complex to get you most of the way there and help you clarify your thinking.

The important thing is that we forced ourselves to think through these kinds of issues as discussed earlier, which we wouldn’t have if we had just looked at Clorox’s stock chart or if we had just said, “Sixteen times earnings seem reasonable”. By thinking about the business, we arrived at a better valuation in which we have more confidence.

Valuing Clorox using a Discounted Cash Flow model

Margin of Safety

We have analysed a company, we have valued it – now we need to know when to buy it. If you really want to succeed as an investor, you should seek to buy companies at a discount to your estimate of their intrinsic value. Any valuation and any analysis is subject to error, and we can minimise the effect of these errors by buying stocks only at a significant discount to our estimated intrinsic value. This discount is called the Margin of Safety, a term first popularised by investing great Benjamin Graham.

Free Cash Flow

Free Cash Flow = Cash Flow from Operations – Capital Expenditure

Rough benchmarks for analysing a firm’s Free Cash Flow

You may also like to learn more on valuation techniques that use cash flow measures, as below.

Return on Invested Capital (ROIC)

Return on Invested Capital (ROIC) is a sophisticated way of analysing a stock for return on Capital that adjusts for some peculiarities of ROA and ROE. Its worth knowing how to interpret it because its overall a better measure of profitability than ROA and ROE. Essentially ROIC improves on ROA and ROE because it puts debt and equity financing on an equal footing. It removes the debt related distortion that can make highly leveraged companies look very profitable when using ROE. It also uses a different definition of Profits than ROE and ROA, both of which use Net Profits. ROIC uses Operating Profits after taxes, but before interest expenses (PBIT)

Again, the goal is to remove any effects caused by a company’s financing decisions -does it use debt or equity?- so that we can focus as closely as possible on the profitability of the core business.

The true operating performance of a firm is best measured by ROIC, which measures the return on all capital invested in the firm regardless of the source of the capital. The formula for ROIC is deceptively simple

ROIC =Net Operating Profit after Taxes (NOPAT)/Invested Capital

Invested Capital =Total Assets – Non-Interest bearing Current Liabilities – Free Cash Flow

(Non-interest bearing current liabilities usually are Accounts Payable and other Current Assets)

You may also want to subtract Goodwill, if it’s a large percentage of Assets.

What does all this mean to you if you hear someone talking about ROIC? Simply that you should interpret ROIC just as you would ROA and ROE – a higher Return on Invested Capital is preferable to a lower one!

Rough benchmarks for analysing a firm’s ROIC

In general, any non-financial firm that can generate consistent ROICs above 15 percent is atleast worth investigating. As of mid 2008, only about 10% of the non-financial firms listed in NSE were able to post an ROIC above 15% for each of the past 5 years, so you can see how tough it is to post this kind of performance. And if you can find a company with consistent ROICs over 30%, there’s a good chance you are really onto something.

You may also like to learn more on other returns-linked profitability measures, as below.