ROIC Valuation Metric for S&P 500 Sectors

In this week’s value report, we use the Economatica system to take a look at ROIC for key sectors of the S&P 500 index.

Return on Invested Capital (ROIC) is one of the most important measures of corporate performance. It represents the amount of profit generated for each dollar invested into the company by bondholders and stockholders. This is a crucial profitability ratio and a key indicator examined closely by investors.

The highest ROIC corresponds to the Semiconductor and Other Electronic Component Manufacturing sector, followed by Pharmaceutical and Medicine Manufacturing and theSoftware Publishers. On the flip side, the lowest ROIC corresponds to Electric Power Generation, followed by Other Investment Pools and Funds (which consists mainly of REITs), and Oil and Gas Extraction.

                                                       Note:  ROIC is defined as net operating profit after tax divided by average Invested Capital. (Tax rate 21%)

                                                       Invested Capital is defined as Total Assets – Cash & ST Investments – Current Liabilities + ST Debt

                                                       Median Values calculated for the sector.

For additional insight into these sectors’ performance, we used the Economatica system to illustrate the relationship between Enterprise Value/Invested Capital (EV/IC) and ROIC with the following scatter plot chart.  EV/IC is an alternative version to the Price to Book Value ratio.

                                            Note:   ROIC is defined as net operating profit after tax divided by average Invested Capital. (Tax rate 21%).

                                           Enterprise Value is defined as Market Capitalization + Total Net Debt

                                           Invested Capital is defined as Total Assets – Cash & ST Investments – Current Liabilities + ST Debt

                                           Median values calculated for the sector.

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