ROIC: the quality criterion that filters the market

2026-06-22 · By Lubin Danilo, founder of Lubin Investment

ROIC measures how efficiently a company converts invested capital into profits. A ROIC above 15% on a sustained basis signals a structural competitive advantage. It is the most discriminating criterion in our method: it immediately eliminates capital-intensive sectors (utilities, steel, oil) and focuses the screener on high-return companies.

What is ROIC and why does it matter?

ROIC (Return on Invested Capital) measures how much a company earns for every dollar of capital it has invested in its business. The simplified formula: ROIC = NOPAT / Invested Capital, where NOPAT is net operating profit after taxes and invested capital is the sum of equity and net debt. This ratio is fundamental because it reveals whether a company creates real value or destroys capital despite apparent profits. A company that invests $100 million and generates $5 million NOPAT destroys value if its cost of capital is 8%.

The 15% threshold: a competitive advantage signal

Why 15%? The average cost of capital for a large US company is generally between 7% and 10%. A company generating 15% ROIC comfortably covers its cost of capital and generates an economic surplus. Maintaining this surplus for 5, 10 or 20 years requires a structural competitive advantage: strong brand, network effect, high switching costs, regulated monopoly or patent. This is not a characteristic obtained by chance: it must be actively defended.

Examples in our screener: from Mastercard to KNSL

Mastercard shows ROIC above 50% — one of the highest among major global companies. This figure reflects the two-sided payment network (buyers and merchants) that creates a near-impossible-to-replicate quasi-monopoly. Kinsale Capital (KNSL) generates over 25% ROIC in specialty E&S insurance, through disciplined underwriting and superior claims management. VeriSign, with its .com domain monopoly, also shows exceptional ROIC. In contrast, electric utilities rarely generate more than 8-10% ROIC despite their massive assets.

Why ROIC eliminates capital-intensive sectors

Utilities, steel producers, oil and gas companies require enormous fixed capital investments (power plants, blast furnaces, wells) to generate their revenues. These investments have low returns and high maintenance costs. Result: their ROIC rarely exceeds 10%, sometimes even 8%. Our method requires a minimum 15% ROIC to appear in the screener, which mechanically eliminates these sectors — not because they are bad, but because they do not match the profile of a company that creates structural value over the long term.

FAQ

How do you calculate ROIC simply?

ROIC = operating income after taxes / (equity + net debt). For a quick approximation, you can use net income / total invested capital. Data is available in the annual financial statements of each listed company.

Is a very high ROIC always positive?

Almost always. A 50%+ ROIC like Mastercard or Visa signals an exceptional competitive advantage. The only nuance: if ROIC is very high but declining rapidly, this may signal erosion of a competitive advantage. We track the trend, not just the level.

Is ROIC comparable across sectors?

With caution. A 20% ROIC in insurance is very different from 20% in technology, because cost of capital and risk vary. Our method uses ROIC as a first-level filter, not the sole comparison criterion between very different sectors.

Why use ROIC rather than ROE?

ROE (Return on Equity) can be artificially inflated by debt. A company that borrows heavily can show high ROE even with mediocre ROIC. ROIC neutralizes this leverage effect and measures true return on total invested capital, regardless of financial structure.

Can small caps have high ROIC?

Absolutely. Some of our 60 stocks are small caps with excellent ROIC. MCY (Mercury General, California auto insurance) or NSSC (Napco Security Technologies) are examples. Size is not a quality criterion: business model efficiency is what matters.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).