In addition to these three valuation metrics, Warren Buffett wrote in his recent annual letter that returns on unleveraged net tangible assets (ROUNTA) is a way to understand the competitiveness of a business, which makes it a better metric than ROA, ROE, and ROIC.
[ROUNTA Basic formula is: EBIT (1- tax rate) / (Equity + Debt - Intangibles)]
The basic premise is if two companies have the same tangible assets, the one that is able to earn a higher return may have economic goodwill, or sometime referred as an economic moat, within that business.
A business with high ROIC is fantastic, but high ROIC does not necessarily imply this business has strong economic franchise. For example, textile mills in the early 20th century enjoyed excellent ROIC, but it was mostly based on tangible assets that can be duplicated by other competitors in the long run.
In addition, companies tend to overpay for acquisitions. As a result, the combined entity will appear to have below-average ROIC due to goodwill and intangibles. However, it does not represent the true economics of the underlying businesses. ROA faces this issue as well.
Finally, a company with high leverage typically will have much higher ROE than a company with no leverage, but this advantage is a result of capital structure, instead of actual business performance.
Therefore, ROUNTA is the most informative metric but all metrics should be taken into consideration to have a better understanding of the business.
Below is a list of companies with above average ROUNTA and near their 52 weeks low. I will present a couple interesting companies in my next article for investment consideration.
|Ticker||Country||Name||52Wk Low % Chg||ROUNTA||Market Cap (in million)|
|SGU||US||STAR GAS PARTNER||5.9||26||290.6|
|HNZ||US||HJ HEINZ CO||10.5||91||17,034.2|
|CPB||US||CAMPBELL SOUP CO||10.5||116||10,411.9|
|GIS||US||GENERAL MILLS IN||11.2||12||24,877.1|
|DPS||US||DR PEPPER SNAPPL||12.1||9||8,256.0|
|SJM||US||JM SMUCKER CO||13.6||11||8,545.9|
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.