Why Top Investors like Phil Town and Joel Greenblatt LOVE this Stock Metric: Return on Capital
Today we are going to take a look at another item on my investment checklist. This on is know as Return on Capital which is also referred to as Return or Invested Capital...so if you see ROC or ROIC when doing your research, this is the same thing.
Phil Town preaches about this in his book Rule #1 and at his seminars and billionaire Hedge Fund manager, Joel Greenblatt also talks about this at length in his book, The Little Book that Beats the Market.
Return on Capital is the Rate of Return a business earns on investor (stockholders or bondholders) money that they are investing.
In this video, you will learn what Return on Capital (aka Return on Invested Capital) is, why we use it, and where to find this information.
Warren Buffett has said that we need to invest in a company that is run my a competent management team and a company that has a competitive advantage over their competitors.
One of the ways we can see if a company has both of these is to look at their Return on Capital. If a company has a better ROC then their peers, then there may be something special about the business. Otherwise, the competition would be able to come in and take their customers away from them, take their ideas from them, which could drive down ROC.
If a company has consistently earned a higher Return on Capital then their peers, then this could be a sign of not just a competitive advantage, aka a Moat, but it could also be a sign that the management team is running the business very efficiently. This is exactly what we, the shareholders, want to see.
If you have any questions, please leave a comment below.
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