Don't Be Fooled by Fancy EPS! ROIC is the Real MVP

Tired of getting tricked by flashy earnings numbers? This article reveals the truth about EPS and introduces you to the real superhero of investing: ROIC!

Alright, buckle up buttercup, because we're about to dive deep into the wacky world of investing, where numbers dance, profits sing, and sometimes, companies try to pull the wool over your eyes! You see, many investors get all starry-eyed over this thing called Earnings Per Share (EPS). They think it's the holy grail, the magic bean that'll lead them to a pot of gold. It's like judging a book by its cover, or a comedian by their height - superficial, my friend, superficial!

Now, don't get me wrong, EPS ain't entirely useless. It's like that friend who's always fun at parties but maybe not the most reliable when you need a ride home at 3 AM. EPS tells you how much profit a company makes for each share of its stock. Sounds good, right? But here's the kicker: EPS can be a bit of a drama queen, prone to exaggeration and putting on a good show.

The EPS Smokescreen: Where Numbers Can Lie

Imagine a company that's like that kid in school who tries to look cool by hanging out with the popular crowd, even if it means ditching their true friends. This company goes on an acquisition spree, buying up other businesses left and right. Sure, their EPS might shoot up like a rocket, but it's all smoke and mirrors! Those acquisitions could be duds, draining the company's resources faster than you can say "Enron."

And then there's the cost-cutting craze. Companies slash expenses like a maniac on Black Friday, laying off employees, squeezing suppliers, and maybe even cutting back on toilet paper in the bathrooms (ouch!). This might boost EPS in the short term, but it's like trying to lose weight by chopping off a limb – not sustainable, my friend!

Finally, we have the share buyback bonanza. It's like the company is trying to impress its shareholders by throwing a lavish party with all the bells and whistles, but they're secretly maxing out their credit cards to pay for it. Share buybacks reduce the number of shares outstanding, making each remaining share look more profitable. But it's just a temporary sugar rush, not a long-term solution.

Enter ROIC: The Superhero of Financial Metrics

But fear not, dear investor, for there's a superhero in the world of finance, and its name is Return on Invested Capital (ROIC)! Think of ROIC as the wise old sage, the Gandalf of investing, who sees through all the trickery and reveals the true nature of things.

ROIC tells you how effectively a company uses its capital (both debt and equity) to generate profits. It's like judging a chef not just by how fancy their dishes look, but by how delicious they actually taste. A high ROIC means the company is a lean, mean, profit-making machine, churning out returns like a bakery on a Saturday morning.

Tesco: A Cautionary Tale

Remember Tesco, that British supermarket giant? They were like the popular kid in school who everyone thought was destined for greatness. Their EPS was rising steadily, and investors were throwing money at them like confetti. But behind the scenes, their ROIC was plummeting faster than a lead balloon. Turns out, they weren't using their capital efficiently, and eventually, their performance went south. It's a classic case of "all that glitters is not gold."

The WACC Attack: Battling the Cost of Capital

Now, here's where things get really interesting. Both Terry Smith and Warren Buffett, two investing legends who probably have more money than Scrooge McDuck, say that companies need to earn returns that exceed their cost of capital. This cost of capital, also known as the Weighted Average Cost of Capital (WACC), is like the interest rate a company pays on all the money it borrows and the return it needs to provide to its shareholders.

Think of it like this: if you borrow money from the bank at a 5% interest rate, you better invest that money in something that earns you more than 5%, or you're just digging yourself a financial hole. ROIC tells you if a company is winning this battle against the WACC, while EPS and P/E ratios are clueless about this crucial factor.

The ROIC Revelation: Investing for the Long Haul

So, my dear investor, if you want to build a portfolio that stands the test of time, like a castle made of solid bricks instead of straw, focus on ROIC! It's the true measure of a company's ability to create lasting value. Don't be fooled by the flashy EPS numbers; they might be hiding a less glamorous reality. ROIC is your trusty compass, guiding you towards companies that are truly worth your investment.

Remember, investing is a marathon, not a sprint. And in the long run, it's the companies with high ROIC that will cross the finish line with a smile, leaving the EPS pretenders in the dust.