return on capital (ROC)

Popular Terms
Ratio measuring the profitability of a firm expressed as a percentage of funds acquired from investors and lenders. Also called return on invested capital. Formula: Income after taxes x 100 ÷ (Equity + Long-term debt).

Notable Quotable

Quadrupling Earnings
"When returns on capital are ordinary, an earn-more-by-putting-up-more record is no great managerial achievement. You can get the same result personally while operating from your rocking chair. Just quadruple the capital you commit to a savings account and you will quadruple your earnings. You would hardly expect hosannas for that particular accomplishment. Yet, retirement announcements regularly sing the praises of CEOs who have, say, quadrupled earnings of their widget company during their reign -- with no one examining whether this gain was attributable simply to many years of retained earnings and the workings of compound interest. The power of this simple math is often ignored by companies to the detriment of their shareholders. Many corporate compensation plans reward managers handsomely for earnings increases produced solely, or in large part, by retained earnings -- i.e. earnings withheld from owners."
- Warren Buffett

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