The Importance of ROIC

Author: John Huber Source: Saber Capital

Overview

John Huber's five-part series exploring Return on Invested Capital (ROIC) as the primary measure of business quality and the foundation of durable competitive advantages.

Key Themes

Part 1-2: ROIC Basics

ROIC = Net Operating Profit / Invested Capital

Huber argues:

"The single best measure of a company's financial performance is return on invested capital."

High ROIC businesses create value; low ROIC businesses destroy it—even if they appear profitable on the surface.

Part 3-4: Reinvestment vs. Legacy Moats

Two types of moats in relation to ROIC:

1. Legacy Moats — Existing competitive advantages that are eroding
2. Reinvestment Moats — Companies that can continue investing at high ROIC

"The key question is: can the company continue to earn high returns on incremental capital?"

Part 5: ROIC and Valuation

High ROIC businesses often justify premium valuations because:

• Growth creates value when ROIC > WACC
• The compounding effect of reinvesting at high rates
• Duration of competitive advantage matters enormously

Why ROIC Matters More Than EPS

Traditional metrics like EPS can be misleading because:

• Companies can manipulate earnings through accounting
• Growth funded by high-cost capital destroys value
• ROIC shows actual returns on capital deployed

The Economic Reality

Scenario	ROIC vs WACC	Effect
High ROIC, Reinvests	> WACC	Creates compounding machine
High ROIC, No Growth	> WACC	Returns cash to shareholders
Low ROIC, Growth	< WACC	Destroys value
Negative ROIC	Negative	Value destruction

Key Quotes

"The ultimate test of a company's quality is not whether it earns profits, but whether it earns profits on the capital it deploys."

"A business that earns 20% on invested capital but can only grow modestly is often worth more than a business earning 6% that can grow rapidly."

Related Concepts

• capital-allocation
• compounding
• intrinsic-value
• moat

Source

Saber Capital Management research series, 2021.