chapter 4: Profitability

Profitability measures we tested include return on invested capital, return on capital employed, return on equity, return on assets, profit margins, income per employee, economic profits, incrmental return on capital.

Combing profitability and valuation（盈利能力和估值） is an especially strong strategy.

（1）Return on invested capital (ROIC)

The analyst first calculate net operating profit after tax (NOPAT). This consists of operating profit minus special items and cash operating taxes.

Next, the analyst calculates invested capital, which is equal to the book value of common equity plus long-term debt, plus preferred stock and minority interest.

ROIC = NOPAT / invested capital

The main advantage of ROIC as a measure of profitability is that it compares income to the total investment in a firm---investments made both by oweners (equity investments) and creditors (debt investments). Thus, ROIC provides a good overall picture of a company's level of profitability.

ROIC works well as a single-factor strategy.

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