Introduction
Every time the market crashes, I see the same thing happen around me. Investors panic, sell everything, and they will probably never touch stocks again.
Then the market recovers, and those same people regret their decisions. What they realized at that time was:
“The crash was not the problem. The wrong stocks that they picked were the problem.”
I have been studying this pattern for some years now.
And what I have noticed is that not all stocks recover equally after a market crash.
- Some bounce back sharply.
- Some crawl back slowly.
- And some, they simply never recover.
This difference is not random. There is a reason behind it.
That reason can be attributable to a metric called Return on Invested Capital (ROIC).
Once I understood this metric properly, my entire way of looking at stocks changed.
In this post, I’ll talk about what ROIC is and why it is one of the most powerful metrics for stock analysts.
I’ll also share with you which Indian companies I find genuinely interesting when I look at this metric.
Table of Contents
1. What Is ROIC, and Why Should You Care?
Let me explain this with a simple example.
Take two mid-sized Indian IT companies. Let’s call them Company A and Company B. Both are in the software services space. Both report a net operating profit of Rs. 500 crores in the same financial year.
On the surface, they look identical.
But when you look at the capital they have deployed to generate that profit, the picture changes completely.
- Company A runs a lean operation. It has low fixed assets and minimal working capital. Its total invested capital is Rs. 1,600 crores. This way, the ROIC of A is 31%.
- Company B, on the other hand, has invested heavily in infrastructure, offices, and equipment. Hence, it has a total invested capital of Rs. 6,500 crores. This way, the ROIC of A is 7.7%.
Same profit, same industry, same year, but one business is clearly far more efficient than the other.
ROIC tells you how much profit a company is generating relative to the capital it has deployed in its business.
A company with a high ROIC is doing more with less. And over time, that efficiency compounds into serious wealth for its shareholders.
2. ROIC Alone Is Not Enough — You Need to Compare It with WACC
Here is where most retail investors stop. They calculate ROIC, see a decent number, and feel satisfied.
But ROIC by itself means nothing unless you compare it with the company’s Weighted Average Cost of Capital, or WACC.
WACC is essentially the minimum return that a company must generate to justify the cost of its funding (both debt and equity).
For most Indian companies, the WACC typically falls somewhere in the range of 10% to 14%.
- If a company’s ROIC is higher than its WACC, it is creating value. It is earning more than what it costs to run the business.
- If ROIC is lower than WACC, the company is actually destroying value. This is true even if it is showing a positive profit on its P&L account.
This is a point that I think many investors do not realize. As investors, we must understand the following:
- We must look at a company like a business.
- To run a business, it requires capital, and all capital has a cost (which is WACC)
- The profit generated by the business is only one goal.
- The other goal is to ensure that the profit generated justifies the capital that has been used to operate the business. We call it “return on capital.”
- ROIC is the measure of return that we can calculate to know if the return is greater than its cost of capital (WACC).
A company can be reporting growing revenues, growing net profits, and growing EPS, but it can still be a value destroyer. How? When its ROIC is less than its WACC.
In this case, the return it is generating is not even covering the cost of the capital it has consumed.
3. Why High ROIC Stocks Recover Faster After a Crash
Now, let us come back to the original question.
Why do some stocks recover sharply after a market crash while others do not?
The answer is simple.
High ROIC companies have strong competitive advantages. They have pricing power, loyal customers, superior products, and lean capital structures. These are the qualities that have ensured that their ROIC remains high at all times.
These qualities do not disappear during a market crash. The business fundamentals remain intact. And once the panic settles, institutional investors, mutual funds, foreign investors, and large hedge funds know exactly which companies to buy back first.
They go back to these high ROIC names.
Low ROIC companies, on the other hand, were already struggling before the crash.
The crisis only makes their situation worse. They do not have the same buffer. They do not have the same fundamental strength. So their recovery is slow, or in many cases, it simply does not come.
4. My Watchlist: High ROIC Indian Companies Worth Tracking
Disclaimer: The companies mentioned below are part of my personal watchlist for study and research purposes only. This is not investment advice. Please do your own due diligence before making any investment decisions.
When I look at the ROIC data across Indian listed companies, these are the names that stand out to me as structurally strong businesses:
- Procter & Gamble Hygiene & Health Care has delivered a median ROIC of over 160% across the last several years. That is an extraordinarily capital-light business. It is the kind of number that tells you the company barely needs to reinvest to keep growing.
- Colgate-Palmolive India has maintained a median ROIC of around 68%. Decades of brand trust and a product that people buy every single month — this is what capital efficiency looks like in a consumer business.
- Castrol India sits at a median ROIC of around 43%. A well-known brand in the lubricants space with consistent cash generation and minimal capital intensity.
- Sanofi India and Abbott India are two pharma names I watch closely. Both have shown strong multi-year ROIC numbers — Sanofi around 39% and Abbott around 43% on a median basis. Pharma companies with strong parent brands and low capital requirements tend to show up well on ROIC.
- Oracle Financial Services Software is interesting because it operates in a niche — banking software — where switching costs are very high. Its median ROIC of around 36% reflects this competitive position.
- Tips Industries is a smaller name, but its median ROIC of around 45% is hard to ignore. The music rights business is an asset-light model with recurring income.
- Swaraj Engines, Foseco India, Esab India, and Gillette India are other names I track — all showing consistent ROIC numbers well above 25%, with reasonably stable business models.
5. How I Use This in Practical Life
I do not rush to buy high ROIC stocks at any price. That is where the majority of investors can get hurt, even after holding high ROIC stocks in their portfolio.
Most of these companies trade at premium valuations all the time. Why? Because the market already knows they are good businesses.
What I do is prepare a watchlist of these high ROIC companies and wait.
Then, I wait for a market-level crash, like the ones we have seen in 2008, 2020, or more recently. During this time, on the index level itself, we can see 10-15%+ corrections in price.
Sometimes, a company-specific piece of bad news can also temporarily drag the stock down.
These are the types of investing windows I look for.
No doubt, I have to wait a lot for these opportunities. But I have time because I pick stocks not for 5-7 years, but to keep them in my portfolio for a lifetime. At least, while buying the stock, I have this mindset.
There have been a few high ROIC stocks that I bought during 2008 and 2012, which I sold after 2014. There are exceptions, but generally speaking, high ROIC stocks deliver better returns when bought during corrections or crashes.
We must always remember that a fundamentally strong business has not changed just because the market has fallen 25%. Its ROIC is still high. It may fall temporarily for a few quarters (like in a war situation or a high crude oil price environment), but it will recover when the new flows become favourable.
Most of these companies keep their competitive advantage intact.
Their price can come down, but the business value will remain high. That gap is the opportunity for long-term investors.
Conclusion
Markets will always give us crisis moments. That is not something we can control.
What we can control is whether we are holding the right businesses when the recovery comes.
ROIC is not a magic formula. But it is one of the most honest indicators of business quality that I have come across.
A company that consistently earns well above its cost of capital, through good times and bad, is a company worth owning. Everything else follows from there.
Have a happy investing.
