What Investors Should Understand About Home Depot's Sky-High Return on Invested Capital
Every time I read a Home Depot (NYSE: HD) quarterly report, I have to stop and marvel at its off-the-charts return on invested capital, or ROIC. This vital metric tracks the percentage return a company earns over the cost of its debt and equity capital. It can be simply expressed as net after-tax operating profit divided by invested capital, which is typically defined as long-term debt plus equity.
In its fiscal third-quarter 2019 earnings report issued in late November, Home Depot calculated its ROIC for the trailing 12-month period at 45.1%. That's a dramatic reading given that ROIC in the teens is usually the mark of a highly functioning company.
Such a lofty ROIC means either that the company is unusually profitable, or that it's extremely efficient at generating financial returns from its invested capital base. We know that while Home Depot is a leader in the do-it-yourself home improvement marketplace, as a retailer, it doesn't possess extraordinary margins. Indeed, in recent quarters, the company's net profit margin has hovered around 10% -- a healthy, though not stellar, level of profitability. Thus, the capital base must be influencing the ratio.
Source Fool.com
