Many investors are familiar with valuation metrics like price-to-earnings and price-to-sales ratios, and those certainly have their place in helping to evaluate companies on a relative basis. But they don't provide much insight into how efficiently a business operates or how effectively management spends cash.
That's where the return on invested capital (ROIC) metric comes in. It measures the profit on every dollar invested, whether it's used to fund operations or purchase assets, or returned to shareholders in the form of stock buybacks or dividends. Thus, it can help investors determine which management teams of which companies are better at allocating capital.
Based on earnings results over the past several years, the teams at Apple (NASDAQ: AAPL) and Mastercard (NYSE: MA) have this down to a science.
For further details see:
The Hidden Number Behind Mastercard's and Apple's Incredible Gains