ROIC improves on ROA and ROE because it puts debt and equity financing on an equal footing: It removes the debt-related distortion that can make highly leveraged companies look very profitable when using ROE. It also uses a different definition of profits than ROE and ROA, both of which use net income. ROIC uses operating profits after taxes, but b

Paying less taxes and buying back shares are good things for shareholders, no question, but they’re short-term fixes rather than long-term sources of earnings growth.

applaud firms that do something markedly different from their peers or from conventional opinion.

Does the firm tend to sign long-term contracts with clients?

Return on invested capital is a sophisticated way of analyzing return on capital that adjusts for some peculiarities of ROA and ROE.

simply revenue minus cost of sales. Once you have gross profit, you can calculate a gross margin, which is gross profit as a percentage of revenue. Essentially, this tells you how much a company is able to mark up its goods.

holy grail for figuring out whether a company is generating cash. Also known as operating cash flow, it’s the result of adding or subtracting the previous items from net income.

The value of a stock is equal to the present value of its future cash flows. No more and no less.

difference between the target firm’s tangible book value and the purchase price is called goodwill, and it’s supposed to represent the value of all the intangible assets—smart employees, strong customer relationships, efficient…

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