Why incremental returns on the capital are most important for stock returns (part 1 overview) and how to estimate it with a model (part 2 example) plus a key profit metric that’s not well-known!
- 00:00 Hedge funds look for rising ROIC
- 03:51 Why high ROIC doesn’t mean you’ll get higher returns
- 06:57 Why incremental return is most important
- 07:42 Part 2: Three steps to estimate future returns
- 11:11 Estimating earnings with a financial model
- 15:23 Estimating the capital required
- 19:48 Calculating the return on invested capital
- 24:02 Key metric: Incremental operating margins
- 26:49 What improves returns for the company
Research:
Accruals, Capital Investments, and Stock Returns
K.C. John Wei and Feixu Xie
https://www.tandfonline.com/doi/abs/1…
Return on Invested Capital How to Calculate ROIC and Handle Common Issues
Michael J. Mauboussin, Dan Callahan
https://www.morganstanley.com/im/publ…
Terry Smith: Return on Capital Explained (WDFC vs. COKE case study) Terry Smith: Return on Capital Explained
