Return on invested capital (ROIC) is one of the most important profitability metrics. It measures how efficiently a company generates profit from the capital invested in its business. Invested capital includes debt, equity funding, and leases. ROIC shows how well a company converts this capital into operating profits. A higher ROIC generally indicates more effective capital allocation and stronger financial performance.
Calculations of ROIC can differ. The data for this analysis comes from Koyfin. The formula used is net profit after tax (NOPAT) divided by the average invested capital over the past two years. NOPAT is the same as earnings before interest and taxes (EBIT), except it subtracts taxes paid.
The resulting ROIC percentage shows how many cents in after-tax operating profit a firm generates per dollar invested. Below, I’ll detail three large-cap U.S. stocks that generated among the highest ROIC over the last 12 months.
NVIDIA: World-Beating Margins Are Creating Large ROIC
[content-module:CompanyOverview|NASDAQ: NVDA]It should come as no surprise that tech giant NVIDIA NASDAQ: NVDA finds itself on this list. Over the last 12 months, the king of the semiconductor industry has had a ROIC of nearly 85%. This means that for every dollar invested, the company generated $0.85 in after-tax profit. It generated NOPAT of over $70 billion with $130 billion in revenue, a margin of 54%.
Given the rapid demand for NVIDIA’s graphics processing units (GPUs) and their related systems, it makes sense why the firm is so effective in generating profit. With the company having the most advanced chips and systems to go with them, a significant lack of competition exists. This allows the company to have sky-high margins.
Almost all of NVIDIA’s margins are near or equal to the highest among global tech firms. More competition drives down margins, as sellers have to compete more on price. However, with a truly differentiated product like NVIDIA's, competition has yet to really put a big dent in the company’s pricing.
Still, the company’s guidance indicates that it expects adjusted gross margin to fall to just under 71% in its next quarter results at the midpoint. This would be a gross margin contraction of 810 basis points versus its peak of nearly 79% in Q1 2024. This is largely due to initial costs and inefficiencies associated with delivering and ramping up production of its latest Blackwell chips. However, the company said that once production is fully ramped, it expects “gross margin will improve and return to the mid-70s, late this fiscal year”. It is also possible NVIDIA may be starting to compromise a bit on pricing as competition increases. However, its gross margins were already so high that it has room to accommodate fluctuations.
McKesson: A Lesson in ROIC Calculation
[content-module:CompanyOverview|NYSE: MCK]McKesson (NYSE: MCK) has achieved an ROIC of over 81% over the past 12 months. It primarily distributes drugs to pharmacies and healthcare facilities. But despite bringing in over $344 billion in revenue over the past four quarters, the company only has $4.7 billion in NOPAT to show for it. That is a margin of less than 2%. So, why does the firm rank so high in terms of ROIC? It is because McKesson is aggressively buying back shares.
The company has spent over $3 billion on buybacks each year since 2022. This lowers the company’s common equity, which has now turned negative, decreasing the denominator of the ROIC equation. This means one could argue McKesson’s ROIC is artificially inflated due to buybacks. On the other hand, buybacks themselves are a return of capital to shareholders.
In my view, the company is optimizing its capital structure, ensuring that only the necessary capital remains invested. This makes ROIC a valid measure of profitability on actively deployed capital. This exercise shows that because metrics like ROIC are simply mathematical calculations, they can initially lead to counterintuitive conclusions if not analyzed in context. Understanding what drives these calculations is critical to using the metric effectively.
Fortinet: Strong Margins and Improving Growth Drive High ROIC
[content-module:CompanyOverview|NASDAQ: FTNT]The cybersecurity firm Fortinet (NASDAQ: FTNT) has achieved a high ROIC of 67% over the last 12 months. Similar to NVIDIA, the company’s margins are also very high. On just under $6 billion in revenue, the company generated NOPAT of $1.5 billion, a margin of around 25%.
Fortinet has accelerated its quarterly revenue growth for the last four quarters. It has also increased margins, both up and down its income statement. This has helped the stock achieve a return of nearly 60% over the past 52 weeks as of the Feb. 25 close.
In terms of U.S. large-cap cybersecurity pure plays, Fortinet’s gross and operating margins lead the pack by a substantial amount. Although its revenue growth is certainly on the lower side compared to competitors, its exceptional profitability makes it stand out.
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