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Compare And Contrast ROA, ROE, And ROIC. Which One Is Most Informative And Why?

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)
UNTD US UNITED ONLINE 0.6 9 429.1
ATB CN ATRIUM INNOVATION 4.0 5 332.0
VIV FP VIVENDI 4.4 29 23,361.4
MDA CN MACDONALD DETTWI 4.8 208 1,404.1
OSSR IR OSSUR HF 5.5 9 682.4
SGU US STAR GAS PARTNER 5.9 26 290.6
DV US DEVRY INC 6.3 523 2,324.5
REC IM RECORDATI SPA 6.4 26 1,535.6
TOU FP TOUPARGEL GROUPE 7.2 11 122.4
CLX US CLOROX CO 8.1 61 8,908.3
PEP US PEPSICO INC 9.3 103 101,055.1
ACOM US ANCESTRY.COM INC 9.5 10 985.0
SLH US SOLERA HOLDINGS 9.8 9 3,331.1
K US KELLOGG CO 9.8 67 18,893.8
ABC US AMERISOURCEBERGE 9.9 35 9,802.9
HNZ US HJ HEINZ CO 10.5 91 17,034.2
CPB US CAMPBELL SOUP CO 10.5 116 10,411.9
TRI CN THOMSON REUTERS 10.8 3 24,368.8
MATW US MATTHEWS INTL-A 11.0 20 918.2
WPI US WATSON PHARM 11.0 55 7,651.5
MFT NZ MAINFREIGHT LTD 11.1 59 778.8
GIS US GENERAL MILLS IN 11.2 12 24,877.1
CAH US CARDINAL HEALTH 11.4 136 14,460.0
HPQ US HEWLETT-PACKARD 11.8 6 48,583.3
DPS US DR PEPPER SNAPPL 12.1 9 8,256.0
RCENTROA MM GRUPO RADIO-A 12.5 50 174.7
JW/A US WILEY JOHN&SON-A 12.8 6 2,824.9
MEDIQ NA MEDIQ NV 13.0 28 977.8
WLP US WELLPOINT INC 13.1 49 21,775.4
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.