Investors should give serious consideration to a company’s return on invested capital (ROIC) before they invest in a company by purchasing that company’s stock.

Investor educational company, Compounding Quality, provides the following example. Suppose that there are 2 companies:

• Company A: ROIC of 5% and reinvests all its profits for 25 years
• Company B: ROIC of 20% and reinvests all its profits for 25 years

Can you guess how much company A and B would be worth if you invested $10,000 in both (assumption: valuation remains constant)?

In this example, an investment in company A would be worth $33,860 while an investment in company B would increase to $953,960!

This simple example beautifully shows the importance of ROIC and the power of compounding.

ROIC is a measure of how much cash a company gets back for each dollar it invests in its business.

ROIC is a much better predictor of company performance than either return on assets or return on equity. In ROA and ROE, the key metric is net income. Net income often has nothing to do with the profitability of a company. Significant expenses are not included in net income such as interest income, discontinued operations, minority interest, etc. which can make a company look profitable when it is not.

Also, ROA measures how much net income a company generates for each dollar of assets on its balance sheet. The problem with using this metric is that companies can carry a lot of assets that have nothing to do with their operations, so ROA isn’t always an accurate measure of profitability.

Companies with higher-than-median ROIC (when viewed in conjunction with their overall capital-expenditure and operating-expenditure strategy) will deliver better returns over the long term. A high ROIC rewards companies that are able to produce the highest net operating profit with the least amount of invested capital.

What does ROIC mean?

Return on Invested Capital ratio provides insight into the extent to which a company efficiently allocates capital to profitable investments or projects, thereby generating returns. Comparing the ROIC to the weighted average cost of capital (WACC) reveals whether or not this is happening effectively.

ROIC basic formula

The basic formula for ROIC is as follows:

ROIC uses net operating income after tax (NOPAT) in the numerator. This is obtained by reducing EBIT (“Earnings Before Interest and Tax”) by the prevailing tax rate.

For the denominator, this ratio uses invested capital. That equals total assets (current and fixed assets) minus non-interest-bearing current liabilities (all current liabilities excluding bank loans and leases).

• Current assets = all items that are relatively easy to convert to cash such as inventories, trade receivables, cash investments and cash.
• Fixed assets = all operating assets used by the company for a long time such as land and buildings which are considered tangible fixed assets. However, there are also intangible fixed assets to be taken into account, such as patents and goodwill.
• Current liabilities = current liabilities with a maximum repayment period of one year such as, for example, supplier credit or taxes payable.

Relationship between ROIC and WACC

Revenue growth and return on invested capital are the basis of value creation. However, regardless of revenue growth, the return on invested capital must always exceed the cost of capital. Even high sales growth combined with too low a ROIC will always result in loss of value. After all, excessive costs eat into profits. So, reducing costs takes precedence over revenue growth.

The cost of capital includes the minimum expected weighted average return (WACC) of all investors for bearing the risk that the future cash flows of an investment may deviate from expectations.

Consequently, the ROIC result should always be compared against the WACC. Only when the ROIC is greater than the WACC can it be concluded that the company is earning more than the cost of capital and thus creating value. The formula to calculate the Weighted Average Cost of Capital is equal to the firm’s average cost of capital (cost of equity + cost of debt).

The basic ROIC formula includes by default all excess cash, goodwill and acquired intangible assets (patents, brands, etc.). If you use a minimum ROIC of say 15%, you will already be able to eliminate a lot of companies from your list. What remains are companies for which you know with certainty that they create value.

What is ROIC?

It's one of the most important financial metrics in the world.

Here's everything you need to know: pic.twitter.com/IwuYPE6IWd

— Compounding Quality (@QCompounding) January 8, 2023

As an investor, you are searching for companies that are cash flow and earnings compounding machines. These companies have a high and consistent ROIC with plenty of reinvestment opportunities. This will allow the company to grow its free cash flow exponentially.

References

1. https://qualitycompounding.substack.com/p/what-you-need-to-know-about-return
2. https://www.chartmill.com/documentation/fundamental-analysis/indicators-and-ratios/416-Return-on-Invested-Capital-ROIC
3. https://www.thestreet.com/opinion/10-stocks-with-high-return-on-invested-capital-and-why-you-should-care-13279076

Collagen is the single most abundant protein in the human body. Mayo Clinic

Collagen’s main purpose is to impart physical structure. Your bones are built on a matrix of collagen, your organs are held together by collagen, your skin is composed of a dense network of collagen, your joints are made-up of collagen, even your blood vessels rely on collagen for structural integrity. Needless to say, collagen is an all-important substance that is vital to health, beauty and well-being.

Collagen is concentrated in bones, ligaments, tendons, skin, blood vessels and internal organs. It helps provide elasticity and strength. As you age, you begin to lose the collagen within your body, and it becomes harder for you to make more.

At least 30 percent of your body’s protein content is made from collagen. Collagen is made from four amino acids, which are the building blocks for protein: proline, glycline, lysine and hydroxyproline. These amino acids are grouped together in a form known as a triple helix, and that is what makes up collagen. For this triple helix to be formed, you need to have enough vitamin C, zinc, copper and manganese in your diet.

Within the human body, 29 types of collagen have been identified, with three types making up the vast majority, according to the Mayo Clinic.

These are the types you’ll usually find in a collagen supplement:

• Type 1 – This type is found in bones, ligaments, tendons and skin for elasticity and strength. The supplement source comes from bovine and fish.
• Type 2 – This type is cartilage. The supplement source comes from chicken cartilage and joint.
• Type 3 – This type is found alongside type 1 in skin, blood vessels and internal organs. The supplement source comes from bovine.

From a general health perspective, it is important to ensure adequate protein within your diet. As you age, your protein needs increase slightly to maintain lean body mass. Consuming foods that contain the primary amino acids that make up collagen may help support skin, hair, nail and joint health as you age.

These foods are good sources of glycine, proline, lysine and hydroxyproline:

• Bone broth
• Unflavored gelatin
• Dairy, especially parmesan cheese
• Legumes
• Non-genetically modified soy, such as tofu
• Spirulina
• Animal sources, such as red meat, poultry, pork, fish and eggs

To support the formation of collagen, it is also important to ensure adequate intake of foods that contain vitamin C, zinc, copper and manganese, writes the Mayo Clinic. These nutrients can be found by eating a varied diet rich in fruits and vegetables, including green leafy and root vegetables, along with nuts and seeds – especially hemp, pumpkin and cashews.

Finally, being mindful of what can damage collagen production is important. Such factors include excess sugar intake, smoking, sun exposure or ultraviolet light, and environmental pollutants.

Unfortunately, collagen breaks down with age and diminishes over time. This loss of collagen is believed to be a primary cause of “aging” and has been linked to numerous health issues – including weaker joints, thinner cartilage and dry, wrinkled skin.

Collagen supplements can deliver targeted nutrition and bioactive collagen peptides to help counteract the loss of collagen as you age.

If you are planning to take a collagen supplement, either in liquid or powder form, it is important to mention that the triple helix that makes up collagen is unable to be absorbed in its whole form, according to the Mayo Clinic. It will first be broken down into individual amino acids within the gastrointestinal tract before reaching the bloodstream. The body will then reassemble and form new proteins where it sees necessary and for a use it feels is needed.

These new proteins may not contain the same amino acids that were initially ingested in the collagen supplement, and it is unknown if these restructured proteins will target the area a supplement manufacturer is advertising. Therefore, it is undetermined at this time if the body will use a collagen supplement that is purported to help skin, hair, nail and joint support to actually make collagen that would do so. In addition, limited large and long-term randomized control trials support the use and recommendation for collagen supplements for the general public.

Hydrolyzed collagen supplements advertise that they are a special type of protein that is “pre-digested” or broken down into smaller peptides for enhanced absorption into the body. Several studies have demonstrated that hydrolyzed collagen peptides are quickly absorbed after ingestion and readily deposited in the body’s tissues, where they act as building blocks and may help to trigger your body’s own internal collagen production.

Source:  https://www.newstribune.com/news/2021/aug/31/Mayo-Clinic-Q-A-Collagen-and-biotin-supplements/

The Federal Trade Commission proposed a rule to prohibit employers from imposing noncompete clauses on employees — a widespread practice that economists say suppresses pay, prevents new companies from forming and raises consumer prices, according to a Washington Post article.

The ban would make it illegal for companies to enter into noncompete contracts with employees or continue to maintain such contracts if they already exist, and it would require that companies with active noncompete clauses inform workers that they are void. Such agreements typically prevent workers from getting jobs at a competitor of a current or former employer for a defined period.

The FTC estimates that banning noncompete contracts would open new job opportunities for 30 million Americans and raise wages by $300 billion a year. If enacted, the rule could send shock waves across a wide range of industries.

One widely cited survey of economists from 2014 found that close to 20 percent of workers in the United States are bound to noncompete clauses across a variety of jobs, from hairstylists to software engineers to nurses. These contracts have forced workers to take on loads of debt during lengthy job searches, locked workers out of their own professions or shunted them into lower-paying industries.

A growing body of research shows that noncompete contracts reduce wages and mobility for workers across various industries by ensuring that employers do not have to compete against one another for workers by raising wages or improving working conditions.

The U.S. Chamber of Commerce contends in a letter to the FTC that reasonable non-compete clauses are pro-competitive because they protect an employer’s special investment in, training of and disclosure of sensitive business information to its employees. For these reasons, state legislatures and courts nationwide continue to protect and enforce such clauses. Moreover, in recent years, many states have adopted non-compete laws that restrict non-compete clauses in order to prevent abuses and to regulate to whom they may be applied, the circumstances in which they are appropriate, and to ensure procedural protections.

References:

1. https://www.washingtonpost.com/business/2023/01/05/ftc-noncompete-ban-lina-khan/
2. https://www.uschamber.com/assets/documents/210927_comments_noncompete_clauses_ftc.pdf

“Taking a nuts and bolts approach to your money is a pretty good indicator that someone is going to be successful. If you know how much you earn, what you need to live on, and where your money is going, you have a foundation on which to build your financial future.” ~ Paul Sullivan, “Wealth Matters” columnist, The New York Times

Between New York Times columnist Paul Sullivan’s ”Wealth Matters” first column in 2008 through of his final column in October 2021, he cataloged the shifting attitudes surrounding what it means to be wealthy in the U,S., the money habits of the rich, and which billionaire excess is worth the money. Among his biggest takeaways: “I always drew the line between people who are wealthy and people who are rich,” he says.

The No. 1 money habit of wealthy people

“You can be wealthy ‘whether you’re a schoolteacher or a billionaire’” ~ Paul Sullivan

 

• Wealth can be defined not as a dollar figure but in terms of what your savings allow you to do.
• Lack of control over your own financial decision-making can be a key indicator of not being wealthy.
• The number one money habit of wealthy people is to write everything down.

Over his tenure writing the column The New York Times, Sullivan talked to nearly several thousand about wealth in America. Unsurprisingly, his No. 1 piece of advice from this collective money wisdom boils down to a rather simple idea. “Have a plan. Write everything down,” Sullivan says.

“As simple as it sounds, it’s important to know how much I’m making, how much I’m saving, how much the house costs,” he points out. “It’s a tedious exercise, but people are always shocked.”

“The wealthiest and most successful people have a plan,” he said. “And it’s not necessarily rigid. They’re regularly looking at it, revising it, and they know where they stand.”

By writing everything down, Sullivan says, you can establish the beginnings of what he calls a “locus of control” — an intentionality around money that is common among people who have the wealth to freely spend on the things that they want.

This content is provided for informational purposes only and is not intended to provide, and should not be relied on for, financial, accounting, legal, or tax advice. Consult your accountant, tax, or legal advisor regarding such matters.

No level of diversification or asset allocation can ensure profits or guarantee against losses.

The views expressed are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.

References:

1. https://www.acorns.com/learn/earning/wealthy-vs-rich/

“The struggle ends when the gratitude begins.” — Neale Donald Walsch

Motivational speaker Tony Robbins reminds us that, “Life is a gift, and it offers us the privilege, opportunity, and responsibility to give something back by becoming more.” So, it’s important to live this gift of life with gratitude, meaning and purpose.  And, the best and simplest way to live a life of meaning and purpose are by embracing an attitude of gratitude, giving back to your community and serving others without expecting anything in return.

Forget resolutions. Write a letter to yourself each year instead

The beginning of the year is a natural time for reflection and the New Year is a good time to commit to leading your best life, explains Fast Company. Goals and resolutions, however, can be impersonal, says Scott Simon, author of Scare Your Soul: 7 Powerful Principles to Harness Fear and Lead Your Most Courageous Life.

To encourage people to hit the core of their goals and values, Simon suggests taking time to write yourself a letter.

“This is a letter that nobody else will see,” he says. “It’s not about resolutions; it’s about feelings and values, and it comes from your heart. Most people have probably never taken the opportunity to write a letter to themselves, but when you do it, magical things start to happen. You start to lead your life according to your own set of goals and wishes that that come from within.”

HOW TO WRITE YOUR LETTER
Your letter should talk about the year you want to have ahead. Simon says the letter should answer five questions:

• What are the fears you plan to tackle, those things you believe are holding you back?
• What are adventures you will embrace in the year to come?
• How will you connect or reconnect with others in your life?
• How will you plan to grow?
• What can you do to serve others?

“These are the key questions that seem to evoke the deepest reactions,” says Simon. “They are what bring up key issues. They’re not necessarily what you’re going to do in Q1 and Q2 for goals. It’s deep, internal, intimate value work.”

REVIEWING YOUR LETTER
Once you write your letter, refer to it over the course of the year. Reading your letter over again will become a key motivator throughout the course of the year. Since it’s personal to you, it will remind you what your key values and goals are.

View your letter as a gift. “Use it to push through and say ‘yes’ to something that may feel uncomfortable but that you feel is the right thing to do,” says Simon. “It can be an incredible upward spiral where one thing will lead to another, then all of a sudden you are leading your best life.”

Your letter should address each of these 7 areas of your life in which you want to win, succeed or grow in 2023!

1. Spiritual
2. Financial (Building Wealth and Financial Freedom)
3. Career
4. Intellectual
5. Health and Fitness
6. Family
7. Social and Emotional Well-being

Setting goals in this many areas may seem overwhelming, but you can do it! You have the power to make significant change in your life, and even though that change won’t happen overnight, you can start today.

You should never lose sight that true happiness comes from fulfillment and the sense that life has meaning and purpose. The choice to pursue spiritual growth, health, wealth or fulfillment is personal. Whichever decision you make, you must live it.

References:

1. https://www.fastcompany.com/90824133/forget-resolutions-write-new-year-letter