value
Returns On Capital First
The rule
Screen first for a long record of high returns on capital. It is the single hardest-to-fake sign of a truly good business.
Where it flips
High ROCE can be misread. It may come from an accounting quirk, a one-off, or a business about to be upended. The fix is to check that the high returns are real, lasting, and driven by a genuine advantage, not one lucky year.
Return on capital tells you how much profit a business earns for every rupee tied up in running it. This is often shortened to ROCE. A company that has earned high ROCE year after year is showing, in hard numbers, that it uses money well. And that is very hard to fake for a long time. Rather than starting from a clever story or a cheap price, start by filtering for businesses with a long record of high returns on capital. That puts the strongest evidence at the front of your search.
A worked example
Haridya screens the market and keeps only companies that earned over 20% ROCE for ten straight years. The list is short, but every name on it has already proven it can turn capital into profit. [illustrative]
How to spot it
- ·ten-year ROCE record, not one year
- ·high returns without heavy debt propping them up
- ·consistency across good and bad years
Pulak Prasad · What I Learned About Investing from Darwin