MASTERCLASS Investment – ROC – Why Return on Capital Employed is Important

MASTERCLASS Investment – ROC – Why Return on Capital Employed is Important

Investment – ROC – Why Return on Capital Employed is Important

The formula (or ratio) for Return on Capital (ROC) is similar to Return on Equity (ROE) but ROC takes into account long-term debt. We wrote about this HERE. An investor looking for long term investments should consider quality, as well as value measures/ratios. In order to grow and compound earnings a company must generate capital returns higher than its cost of capital. Of course, the higher the returns over the cost of capital, the better.

Return on capital provides the investor with quality measures that can be employed with many other ratios. A long term investor aims to purchase assets at a discount, but also wants to buy companies that are earning excess returns on capital. This is the only way a company can sustain an above average growth rate.

A firm’s return on capital can be an indicator of the size and strength of its health. If a company is able to generate returns of 15-20% year after year, it has a great method for transforming investor capital into profits.

Return on capital is especially useful where companies invest a large amount of capital – oil and gas firms, computer hardware companies, and even big department stores. As an investor, it’s important to know that if a company uses your money, you’ll get a respectable return on your investment.

Note – if there is NO debt, the result for ROC will be the SAME as Return on Equity (ROE), however, when there is debt, the denominator figure is larger, resulting in a lower ROC ratio figure than the ROE.

ROC is most useful when using it to calculate the returns generated by the CORE business operation itself, not the short-lived results from one-time events. Gains/losses from foreign currency fluctuations and other one-time events contribute to the net income listed on the bottom line, but they’re not results from business operations. Try to think of what your business “does” and only consider income related to those core business operations.

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit provides a wholistic SMSF assistance, education and administration service continuum - 1. “assistance” is help of whatsoever nature where our overall SMSF experience and knowledge enables us to provide assistance/help without any legal (or “license”) limitations. 2. “education” involves providing knowledge through teaching, coaching and mentoring about all matters SMSF, including (but not limited to) investment issues such as equities and property, 3. “administration” encompasses all admin aspects of legally required SMSF trustee and member record keeping including (but not limited to) audit and ATO matters. In keeping with our key point that SuperBenefit does not provide Financial Advice, where issues arise from 1, 2, and/or 3 above Indicate a need for a legally authorized provider (such as a Financial Adviser) and the client does not have their own service provider, the client can utilize SuperBenefit’s ‘Connect Assist’ … SuperBenefit, in itself, does not provide Financial Advice, but it does provide the wherewithal for great SMSF service. WE do not provide Financial Advice or any other service that requires a legally authorized provider. However, where such advice or service is required we have our ‘Connect Assist’, a SuperBenefit resource we use to connect clients to a Licensed Advisor or other legally authorised service provider. Call us 0407 361 596, no obligation FREE Connection call to see how we can help you!
This entry was posted in Investing - Stock Fundamentals, Masterclass Investment, SMSF Investing, Uncategorized and tagged , , , , , , , . Bookmark the permalink.

Write your thoughts...

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.