The elite and their Return on Invested Capital (ROIC) / by kevin murray

Corporations have a responsibility to their shareholders, to their board of directors, and to their employees, to try to make a profit, of which, profits are made, by the capital so invested into the company, that is wisely utilized so that the cost of goods, and other associated expenses, are less than the gross profit and ultimately the net income of that company.  Those companies that consistently grow and make consistent profits are considered typically to be of more value than companies that are inconsistent in their growth and inconsistent in their profits.  Further, to the point, companies that are proven generators of good profits, especially profits of a sizeable percentage, are considered to be the best run and best managed companies of them all.


While there are many ways to evaluate the effectiveness of a given company, one of them is looking carefully at the Return on Invested Capital (ROIC) of a given corporation, in which, for simplicity sake the formula for ROIC as defined by is:ROIC = After-tax operating earnings / (total assets - non-interest-bearing current liabilities)".  The ROIC for the median of all corporations in America, has grown modestly over the last fifty years, however as reported by, " Excluding goodwill, for example, the 90th percentile of such returns has risen roughly fivefold, from about 20 percent in the mid-1980s to an eye-popping 100 percent in 2014," demonstrating that certain, specific corporations are absolutely dominating their domain and making historically high ROIC returns, which is completely unprecedented over the last fifty years.  Additionally, these very high ROIC returns from a capitalistic and competition standpoint makes little or no sense, since those companies that are experiencing extremely high ROIC returns, should be subject to those returns over some period of time being reduced considerably and to adhere more closely to historic median averages, for high returns in any investment, should ultimately result in competitors reducing such a return by virtue of that competition.


Further to the point, reports that: "Among companies that, in 2003, had a return on invested capital in excess of 25 percent, only 15 percent had a return below that threshold in 2013," which clearly indicates that rather than competition coming in and reducing the ROIC of these elite corporations, that these corporations, for whatever reason(s), appear to be immune to such competition, and hence are able to return outsized ROIC results.    While that might be good for those super performers it isn't good for America as a whole, for it means that a small segment of American corporations are generating an outsized ROIC.  So too, this indicates, that when a company's ROIC is, for instance, 50 percent, as opposed to the median return of ROIC from 1963 to 2004 of about 10 percent, that the company with the ROIC of 50 percent, needs only to reinvest just 20 percent of every dollar so earned, in order to grow exactly 10 percent, indicating that the balance of that return can be used to pay dividends to their stockholders, buy back stock so as to increase their stock price, or buy out other corporations in order to dominate their business niche more, or all of these things, combined; whereas the corporation that makes just 10 percent on their ROIC, needs to invest all of it back into the company in order to continue their growth at that 10 percent.


So too, such concentration of wealth, as demonstrated by the ROIC, implies strongly as this being a significant reason as to why the median wage for workers has been stagnate over the last four decades, since those wages are concentrated to only a very few companies to the exclusion of all others; in addition to the salient fact that those that are able to garner a consistent ROIC of 25 percent or above, are quite obviously taking more monies from the general public by virtue of their higher profits of their goods so being sold, and therefore, redistributing money from the masses to those that are in the privileged catbird seats of those special corporations that have truly gargantuan ROIC returns.