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INTRO

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Don’t be an idiot. That’s the very first rule of investing. Or as Warren Buffett put it, "Rule #1 is never lose money."

I have seen so many investors fall victim to hidden dangers.

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If you ever:

-experienced 20% drops in one of your positions

-wondered why your “growth stocks” aren’t moving

-wished for a market-beating portfolio

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…this article is for you.

A Money-Wasting Business is Worthless

Think about it. What’s the main purpose of any (for-profit) business? To make money.

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So why the heck are investors still chasing unprofitable businesses? When under the influence of wishful thinking, it’s easy to ignore the warning signs.

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A revenue-scaling business looks great at first glance. But there is one big danger there. What if it can’t become profitable because its business model is fundamentally bad?

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Think Spotify. Despite having 220 million paid users, they still aren’t making any money.

“They’ll be profitable in no time.”

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I hear that all the time. But what if they can’t be? Are you prepared to bet on some dream in the future that no one knows if it’ll come true?

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What if I told you, there is a better way?

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Back to Basics

There are only two ways for a business to grow.

A: Expand core operations

B: Buy new operations

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In both cases, they need to be masters of spending money. In case you’re wondering what happens if they aren’t…the “well of money” dries up and

they go under.

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So how can a new investor quickly find out if they aren’t masters of money management? With a simple ratio.

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Return on Invested Capital (ROIC)

Return on Invested Capital (ROIC) tells you how effectively a company uses its money to

generate profits. And all legendary investors use this.

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For instance, if a company has a 10% ROIC, it means that for every $100 the company has invested in its operations, it's making $10 in profit. Is that good? It depends on the industry. But 10% is a good starting point.

The formula?

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ROIC= Net Operating Profit After Taxes (NOPAT) / Total Invested Capital

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It might seem scary now but once you run the numbers a few times it gets in your system.​ But in all honesty, you don’t need to do this manually. There are tons of tools that allow you to get this number quicker. I like stratosphere.io

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And the Top 5? (Conclusion)

Based on ROIC, I have also made a list of 5 companies that are in a very good spot.

But all of these companies also hold appeal with respect to other key metrics and attributes, especially as compares to key peers within their respective industries.

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And they're all currently trading at fair valuation levels with either low or very manageable levels of debt.

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Marsh & McLennan Companies: Marsh & McLennan is a professional services business model that operates in the fields of risk management, insurance, reinsurance, and consulting. Over the last decade, Marsh & McLennan's stock has delivered strong returns, with an average annual return of 19%.

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‍The company is also a true dividend compounder, with dividends per share increasing by an average of 8.8% per year. And because of low capital requirements to operate the business, the company generates a large amount of free cash flow, with a free cash flow margin of 16%.

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Since 2010, free cash flow has increased at a 17% CAGR. Five-year average ROIC: 11.9%

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Nike: Nike operates within the sportswear and athletic industry, designing, manufacturing, and marketing footwear, apparel, and accessories. The company is known for its iconic swoosh logo and its products cater to athletes and sports enthusiasts.

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‍Nike's dividend coverage is strong, with a low debt-to-equity ratio and sufficient free cash flow to maintain and increase dividends. Its dividend has almost tripled in the past 10 years and is projected to continue growing, potentially reaching $3.38 per share in 10 years.

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The company's FY23 Report had strong highlights, including:

• Revenue being up 10% to $51.2 billion.
• Inventories remained flat at $8.5 billion, suggesting continuing operational excellence.
• A cash balance of $10.7 billion more than offsets long-term debt of $8.9 billion.
• Returning $7.5 billion to shareholders, with $5.5 billion on buybacks and $2.0 billion on dividends, providing strong shareholder value.

Five-year average ROIC: 27.7%

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Lululemon: Lululemon follows a retail and lifestyle business model, selling athletic apparel and accessories. The company focuses on yoga-inspired products, aiming to promote an active and healthy lifestyle.

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The brand is strong, and the company is intensely and productively focused on penetrating new product categories, like personal care and footwear, and expanding international markets. Return on Equity is at a leading 31.9% among key peers, and the D/E ratio is only 0.3. Five-year average ROIC: 39.1%

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Molina Health: Molina is a healthcare services business model that offers managed healthcare

plans, providing medical services to individuals and families who are eligible for government-sponsored programs like Medicaid.

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It has achieved strong profit margins through careful attention to managed care basics, cost cutting, and complementary offerings.

The fragmented market also presents ample acquisition opportunities that further boost growth, although regulation is always a potential risk.

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The share price has grown +670% in the past decade, significantly outperforming the Market. Five-year average ROIC: 42.4%

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Teradyne: Teradyne operates in the technology sector, specializing in semiconductor testing

solutions. The company develops equipment that tests the performance and reliability of

semiconductors, catering to the needs of the electronics industry.

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Between 2022 and 2026, Teradyne expects to grow revenue at a CAGR of 12% and EPS at 20%. Between 2018 and 2021, it actually did a lot better, with sales & earnings growth of 21% and 32%, respectively.

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The long-term story remains intact for the Automated Testing Equipment. As long as the underlying market is growing, the need for testing and therefore the testing market will grow as well, and likely at the same rate.

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The balance sheet of the company also looks healthy, with a net cash position having been maintained during the past decade. During the same period, revenue growth rates have ranged between 8% and 12%, with high levels of ROIC, ROE, and a total return of +655%. Five-year average ROIC: 42.9%

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Let me know if you have any questions. Happy to help!

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To get my best work, feel free to join the world’s most powerful stock market newsletter for wealth, stability, and happiness.

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Disclosure/Disclaimer

Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.

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