We'd all like to invest as successfully as the legendary Warren Buffett. He calculates return on invested capital (ROIC) 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 Intel (NYSE: INTC) and an industry peer 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

Intel

32.3%

15.5%

15.4%

32.8%

Texas Instruments (NYSE: TXN)

31.8%

17.3%

27.7%

22.1%

Source: Capital IQ, a division of Standard & Poor's.
*The company recorded a net loss for the period.

Even among the lows in the table above, Intel has maintained a return on invested capital that is consistently higher than 12%. It has grown its gains over the past three years, but now sits just about where it was a half-decade ago.  Texas Instruments also rates well above our 12% threshold for attractiveness, and its returns have grown by almost 10 percentage points from five years ago, suggesting that TI’s competitive position has been improving.

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.

The Motley Fool is recommending 50 stocks in 50 days for its new "11 O'Clock Stock" series. For more information, click here. Then come back to Fool.com every single weekday at 11 a.m. ET for a brand-new pick!

Jim Royal, Ph.D., does not own shares in any company mentioned. Intel is a Motley Fool Inside Value choice. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.