10 high ROIC stocks

Here’s the new list of Value Sense’s top high ROIC picks to buy for the third quarter of 2024.

Return on Invested Capital (ROIC) is a key financial metric that measures how efficiently a company uses its capital to generate profits. ROIC is calculated as:

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

• NOPAT represents the company's core operating profits after taxes
• Invested Capital includes both equity and debt used to fund the business operations

10 High ROIC Stocks to Buy for Q3 2024

Microsoft Corporation (MSFT)

ROIC - 30.2%
Industry median: 3.3%

Taiwan Semiconductor Manufacturing (TSM)

ROIC - 19.1%
Industry median: (1.1%)

Eli Lilly and Company (LLY)

ROIC - 26.2%
Industry median: (39.5%)

Broadcom (AVGO)

ROIC - 24.1%
Industry median: (1.1%)

Oracle (ORCL)

ROIC - 15.2%
Industry median: 3.3%

The Procter & Gamble (PG)

ROIC - 19.5%
Industry median: 10.4%

Home Depot (HD)

ROIC - 34.7%
Industry median: 5.9%

Costco Wholesale (COST)

ROIC - 18.9%
Industry median: 5.8%

AbbVie (ABBV)

ROIC - 18.1%
Industry median: (39.5%)

QUALCOMM (QCOM)

ROIC - 21.8%
Industry median: (1.1%)

Key Points About ROIC:

• It measures how well a company generates profits relative to the capital invested in the business.
• A higher ROIC indicates the company is using its capital more efficiently to generate returns.
• It's generally considered better than metrics like ROE or ROA because it accounts for the entire capital structure.
• ROIC above the company's cost of capital indicates value creation for shareholders

How to Apply ROIC in Investing Research:

1. Compare to Cost of Capital: Look for companies with ROIC consistently above their weighted average cost of capital (WACC), as this indicates value creation.
2. Analyze Trends: Examine how a company's ROIC has changed over time. Consistently high or improving ROIC is a positive sign.
3. Industry Comparisons: Compare a company's ROIC to industry peers to identify potential competitive advantages.
4. Assess Capital Allocation: High ROIC companies tend to be more efficient at allocating capital to profitable projects.
5. Valuation Context: Companies with higher ROIC often trade at higher price-to-book ratios, but may not necessarily be overvalued.
6. Growth Potential: Look at incremental ROIC to assess if a company still has profitable growth opportunities.
7. Competitive Moat: Consistently high ROIC relative to peers can indicate a strong competitive position or economic moat.
8. Divisional Analysis: For conglomerates, try to calculate ROIC for individual business segments to identify strengths and weaknesses.
9. Adjust for Intangibles: Consider adjusting invested capital for R&D and other intangibles to get a more accurate picture for certain industries.
10. Combine with Other Metrics: Use ROIC alongside other financial metrics and qualitative factors for a comprehensive analysis.