How does Apple (AAPL 2.48%) compare against the other four stocks that trade on U.S. exchanges with market caps of more than $1 trillion? It depends on which measurement you use.
Apple certainly beats Amazon (AMZN 0.75%), Google parent Alphabet (GOOG -3.33%) (GOOGL -3.37%), Microsoft (MSFT -1.00%), and Nvidia (NVDA 0.03%) based on market cap and profits. However, its stock performance so far in 2023 has lagged behind all members of the $1 trillion club except Microsoft.
But there's another important area where Apple absolutely dominates. It's blowing away Amazon, Google, Microsoft, and Nvidia on one key metric.
Apple is rocking the $1 trillion club on ROIC
For most companies, a return on invested capital (ROIC) of 10% or more is usually viewed positively by investors. Most of the members of the $1 trillion club easily surpass that level. But Apple is head and shoulders above its mega-cap peers.
Image source: The Motley Fool.
What exactly is ROIC? In a nutshell, it measures how well a company is investing its capital. ROIC is calculated by dividing net operating profit after taxes (NOPAT) by invested capital. NOPAT comes from a company's income statement using the following formula:
NOPAT = earnings before interest and taxes (EBIT) * (1-the company's tax rate)
Invested capital comes from the company's balance sheet. It can be calculated by first subtracting non-interest-bearing current liabilities (for example, accrued expenses) from current assets to determine the company's net working capital. All operating assets including goodwill and property, plants, and equipment are then added to the net working capital to get its invested capital. (New Constructs, the analytics firm that provided the data in the chart, goes deep into the SEC filings to account for every footnote, so your results might differ. But no matter how you compute it, Apple's ROIC is impressive.)
You probably noticed that the above chart also includes another metric: weighted average cost of capital (WACC). This number represents the weighted average of the cost of equity as a percentage of the weighted average of the cost of debt. The lower the WACC, the better. When a company generates more ROIC than WACC, it's creating value for shareholders with its investments.
Why Apple's high ROIC is so important
A high ROIC means that Apple is delivering a bigger bang for the buck with its investments. That's tremendously important in the fast-moving world of technology. It also means that the company can reward its shareholders through dividends and stock buybacks.
Apple's high ROIC also makes it a more attractive pick for careful investors. It's not surprising that Apple ranks as Berkshire Hathaway's largest holding by far. Berkshire chairman and CEO Warren Buffett once defined a great business as one that has "a high return on capital for a long period of time, where we think management will treat us right."
Buffett's inclusion of the words "for a long period of time" brings to mind another key point. Apple's big lead in ROIC over Amazon, Google, Microsoft, and Nvidia right now isn't a fluke. The company has consistently generated high ROIC since the introduction of the iPhone in 2007. It has also beaten the other current members of the $1 trillion club on ROIC during most of the past 10 years.
Does an impressive ROIC make Apple stock a no-brainer buy?
As critical as ROIC is, this one metric doesn't make Apple stock a no-brainer buy all by itself. There are other things to consider, notably including the competitive landscape, growth prospects, and valuation.
However, Apple remains highly competitive in all of the markets where it competes. Artificial intelligence (AI) and mixed reality could give the company new growth opportunities. And while Apple's shares trade at a relatively steep forward earnings multiple of 26, its high ROIC makes that valuation more reasonable than it would otherwise be.
It's possible for a stock with a high ROIC to be a bad pick for investors. I think, though, that Apple continues to be one of the best stocks in the $1 trillion club to buy.
