founders paras chopra, chapter by chapter
42. Business Quality Is Return on Invested Capital
A great business repeatedly turns additional capital into returns above its opportunity cost.
Investors compare a business’s return with safer alternatives. High return on invested capital means the company can deploy money at rates that compensate for risk; the best businesses can repeat this with large amounts for a long time. Immediate accounting profit matters less than lifetime, risk-adjusted returns on the capital consumed.
Use ROIC to compare projects, acquisition channels, and even whether earnings should be reinvested. Include the full capital required and the full discounted return expected. A company that cannot compound money above its cost of capital should return it rather than pursue growth for appearance’s sake.
Original sketch and model by Paras Chopra. Read the source chapter.