An Early Buffett Metric

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Return on invested capital, or ROIC, reflects how effectively a company is investing the money at its disposal. The higher the number, the better.

As with any metric, it's not enough to consider ROIC on its own. The more numbers you crunch, and the more information you digest, the better understanding you'll have of the company, its health, and its prospects. But if you want to get the biggest bang for your buck from high-ROIC companies, you might want to focus on younger, smaller companies.

As Passport Capital hedge fund founder John Burbank noted last year, "One of the keys to Warren Buffett's early success was investing in high return on capital consumer businesses that were relatively immature when he bought them and that grew enormously along with the U.S., the largest economy in the world."

Looking for companies in their youth, with high ROIC numbers and relatively low market caps, seems entirely doable. And it's silly to not look into any investing advice Buffett has offered. Here are several contenders I found when screening for those criteria:

Company	CAPS Stars (out of 5)	Market Capitalization	ROIC
Hansen Natural (Nasdaq: HANS)	****	$3.3 billion	24.9%
Sohu.com (Nasdaq: SOHU)	****	$2.6 billion	26%
Mindray Medical (NYSE: MR)	*****	$3.4 billion	12.8%
Netflix (Nasdaq: NFLX)	**	$2.6 billion	25.4%
IMS Health (NYSE: RX)	*****	$2.7 billion	20.3%
Quality Systems (Nasdaq: QSII)	****	$1.8 billion	30.8%
optionsXpress (Nasdaq: OXPS)	*****	$1.0 billion	27.6%

Data: Motley Fool CAPS; Capital IQ, a division of Standard and Poor's.

Screens like this one are a great way to gather a bunch of contenders for further research. That might include poring over examinations of balance sheets, income statements, cash-flow statements, and annual reports. You'd also do well to include a bit of number-crunching and trendspotting -- for example, examining whether profit margins, various growth rates, and even ROIC are rising or falling.

Let's get small
This screen's focus on smaller companies is also promising, because smaller companies often outperform bigger ones. It's easier, after all, to double your earnings if you're raking in $50 million instead of $50 billion. My colleague Ilan Moscovitz has shown how small caps have trounced big caps. So if you want a chance at picking one of the market's 10 best-performing stocks of the coming decade, looking at small stocks is a great place to start.

For more insights into the mind of Warren Buffett:

• Not Listening to Buffett Cost Me Thousands
• This Is Why Buffett's Buying Stocks
• 3 Stocks on Buffett's Wish List?