We'd all like to invest as successfully as the legendary Warren Buffett. He calculates return on invested capital to help determine whether a company has an economic moat -- the ability to earn returns on its money beyond that money's cost.

ROIC is perhaps the most important metric in value investing. By determining a company's ROIC, you can see how well it's using the cash you entrust to it, and whether it's actually creating value for you. Simply put, ROIC divides a company's operating profit by the amount of investment it took to get that profit:

ROIC = Net operating profit after taxes / Invested capital

This one-size-fits-all calculation cuts out many of the legal accounting tricks (such as excessive debt) that managers use to boost earnings numbers, and provides you with an apples-to-apples way to evaluate businesses, even across industries. The higher the ROIC, the more efficiently the company uses capital.

Ultimately, we're looking for companies that can invest their money at rates that are higher than the cost of capital, which for most businesses lands between 8% and 12%. Ideally, we want to see ROIC greater than 12%, at minimum. We're also seeking a history of increasing returns, or at least steady returns, which indicate that the company's moat can withstand competitors' assaults.

Let's look at Automatic Data Processing (Nasdaq: ADP) and two of its industry peers to see how efficiently they use capital. Here are the ROIC figures for each company over several time periods:

Company

TTM

1 year ago

3 years ago

5 years ago

Automatic Data Processing

22.4%

26.3%

21.7%

3.3%

Administaff (NYSE: ASF)

11.8%

32.5%

85.3%

48.7%

Paychex (Nasdaq: PAYX)

42.4%

56.7%

34.3%

31.8%

Source: Capital IQ, a division of Standard & Poor's.

Automatic Data Processing offers us appealing returns on invested capital, and has consistently given us returns above 20% for the past three years. Paychex offers even more appealing returns, and also shows growth from five years ago, though it's down since last year. Administaff, while it barely misses our 12% threshold for attractiveness, has displayed consistently declining returns over the past three years. I'd want to investigate that decline and the potential reasons for it, to see if it's a result of an eroding moat.

Businesses with consistently high ROIC are efficiently using capital. They can use their extra returns to buy back shares, further invest in their future success, or pay dividends to shareholders. (Warren Buffett especially likes that last part.)

To unearth more successful investments, dig a little deeper than the earnings headlines, and check up on your companies' ROIC.

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Jim Royal, Ph.D., does not own shares in any company mentioned. Paychex is a Motley Fool Inside Value recommendation. Administaff is a former Motley Fool Inside Value recommendation. Automatic Data Processing and Paychex are Motley Fool Income Investor choices. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.