Ask any investor to name management's most important job, and you're likely to get just one answer: Earn the highest possible return on my investment. (Me? I'd probably say, "make sure there's enough coffee for that weird finance guy," but that's just me.)
There exists a strong correlation between return on capital and share prices (duh, right?). Some investors use return on equity (ROE) to measure management's effectiveness, which is OK, but I prefer return on invested capital, or ROIC for short. ROIC measures the return on not only equity but also borrowed funds, which is important because an overleveraged company can show fantastic ROE but only average ROIC. Anheuser-Busch
ROIC's major drawback is the confusion surrounding how to calculate it. I prefer a cash-flow-based method, using unleveraged net operating profit after tax, or NOPAT, divided by total invested capital. NOPAT is cash flow from operations plus after-tax interest expense. Invested capital is total assets, less non-interest-bearing, short-term liabilities.
Got all that?
Good. Regardless of a company's line of business, if it generates more cash with less capital than its competitors, it's usually successful. Taser International
By paying down its long-term debt and improving working capital management, specialty retailer Tuesday Morning
The Spiderman franchise has helped Motley Fool Stock Advisor pick Marvel Enterprises
There's always money to be made helping people slim down, and Weight Watchers
Finally, storage company Western Digital
Ben Graham explained that, over time, the market is a weighing machine. As you can see, companies that generate outstanding returns end up being quite heavy.
If you like what these companies are about, you'll want to check out David Gardner's new ultimate growth stock newsletter, debuting in late September. Be the first to hear about it.
Fool contributor Chris Mallon owns shares of Anheuser-Busch through his private investment partnership.
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