We'd all like to invest like the legendary Warren Buffett, watching our initial thousands of dollars multiply into millions or more. Buffett analyzes companies by calculating return on invested capital (ROIC) in order to help determine whether a company can earn more from its money than it cost to make that money in the first place.

ROIC may be value investing's most important metric. 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 how much investment it took to get that profit:

ROIC = Net operating profit after taxes / Invested capital

If you need it, here's a more detailed explanation. This one-size-fits-all calculation eliminates excessive debt and many of the other legal accounting tricks 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 exceeding their cost of capital, which for most businesses lands between 8% and 12%. Ideally, we want to see ROIC above 12%, at a minimum. We also seek a history of increasing, or at least steady, returns, which indicate some durability to the company's economic moat.

Let's take a look at Union Pacific (NYSE: UNP) and three of its industry peers, to see how efficiently they use cash. Here are the ROIC figures for each company over a few periods.

Company

TTM

1 year ago

3 years ago

5 years ago

Union Pacific

8.0%

5.7%

6.1%

4.0%

Canadian National Railway (NYSE: CNI)

9.5%

8.5%

10.5%

8.5%

CSX (NYSE: CSX)

7.4%

5.7%

6.3%

5.0%

Norfolk Southern (NYSE: NSC)

7.4%

5.0%

6.9%

6.9%

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

While none of the railroads here meets the 12% threshold for attractiveness, each company has shown improvement over the five-year period, suggesting that railroads as a whole are developing a stronger competitive position. And indeed, that increasing competitiveness was part of what prompted super-investor Warren Buffett to snap up Burlington Northern. Union Pacific has seen its ROIC double over the last half-decade, while CSX has seen nearly a 50% improvement, from 5% to 7.4% ROIC. Canadian National has seen a smaller increase but has been consistently above its peers' performance, and Norfolk Southern has seen a solid bump since last year.

Businesses with consistently high ROIC prove that they're efficiently using capital. They also have the ability to treat shareholders well, because they can use their extra cash to pay dividends, buy back shares, or further invest in their franchises. And anyone who knows Warren Buffett knows he loves healthy and growing dividends.

To find more successful investments, dig deeper than the earnings headlines, and unearth the company's ROIC. If you'd like to add these companies to your watchlist, or set up a new one, just click here .

Jim Royal, Ph.D., does not own shares of any company mentioned. Canadian National Railway is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.