Companies with high free cash flow (FCF) margins and FCF yields outperform the market over time...

What matters for long-term investing success.

In our prior dispatch, we learned that return on invested capital (ROIC) is the most important financial metric because:

1. An increase in ROIC always increases intrinsic business value but revenue growth does not always increase intrinsic value. Revenue growth only increases intrinsic value when ROIC is greater than the weighted average cost of capital (WACC).

2. Companies with high ROIC outperform the stock market by a country mile.

3. And companies with rising ROIC (and high incremental returns on invested capital) outperform the market by even more!

Return on invested capital is calculated as net operating profit after tax (NOPAT) divided by average invested capital, so it has a robust profitability metric in the numerator and a balance sheet measure in the denominator. In this way, it is the linchpin that connects a company's profitability (income statement), balance sheet, and free cash flow (FCF). Read more at The Motley Fool

Published Jun 29, 2022