Returns on Capital and an Investment Idea

Posted on Posted in Investment Ideas & Company Research, Investment Philosophy, Investor Letters

A couple years back, I wrote a series on the topic of returns on capital (ROIC) and how significant its impact is on the long-term value of a business. As a long-term shareholder of a business, your ultimate investment result will be determined by the quality of that business over time. One way to measure quality is to figure out the rate of return that the company achieves on its own internal investments (as well as what that company does with the excess cash flow that it can’t reinvest).

If your plan is to own stock in a company over a longer period of time (as opposed to buying stock with plans to sell it to someone else next quarter or next year), then it becomes imperative to estimate the amount of capital a business requires, the share of its earnings that the company can retain and reinvest back into the business, and the approximate rate of return that those investments will achieve going forward.

Simply put, the incremental return on capital (i.e. the ROIC going forward) is really what you want to know if you are interested in approximating a company’s long-term earning power.

Some of the best writing on the subject of ROIC was done by my friend Connor Leonard of Investors Management Corporation (IMC). Connor is a smart investor and an original thinker. He’s one of the few people that I use as a “sounding board” to bounce around various investment ideas and concepts.

Reinvestment Moat

Last year, Connor wrote two pieces called Reinvestment Moats vs. Legacy Moats and Capital-Light Compounders. They are both well-written, clearly laid out posts that do a nice job of explaining why returns on capital are important to long-term investment results.

Over the last year Connor expanded on these concepts in various writings and presentations, a couple of which we are including below. Connor recently presented at ValueX Vail where he outlined his investment thesis on zooplus AG, Europe’s leading online retailer of pet products and a potential Reinvestment Moat. Additionally, Connor puts together investing commentary once a year, which privately-held IMC has allowed Connor to share with Base Hit Investing readers.

Here is Connor’s presentation on zooplus AG:

Download (PDF, 5.81MB)


Connor Leonard’s investment commentary:

Download (PDF, 486KB)


For any questions on the zooplus AG presentation, or any questions/comments regarding Connor’s commentary, please reach out to him at, or on Twitter at @Connor_Leonard.

Thanks for reading!

John Huber is the portfolio manager of Saber Capital Management, LLC, an investment firm that manages separate accounts for clients. Saber employs a value investing strategy with a primary goal of patiently compounding capital for the long-term.

To read more of John’s writings or to get on Saber Capital’s email distribution list, please visit the Letters and Commentary page on Saber’s website. John can be reached at 


5 thoughts on “Returns on Capital and an Investment Idea

  1. I read through Connor’s zooplus report recently and am a big fan of his thought process in general… but I just can’t get confident zooplus should be advantaged against Amazon long-term.

    * I’m neither sure (A) that zooplus’ average prices will remain 8%-17% lower than Amazon or (B) that being ~ 10% lower even matters much once your customers begin signing up for prime. On this second point, Amazon is aggressively pushing prime membership in Europe (, and once customers sign up for prime, there is a strong tendency (myself included) to not bother shopping around the internet over small price differences.

    * I’ve heard some say Amazon is just not set up to ship large items. My order history disproves this thoroughly.

    * It is true has competed well against Amazon in the US… but they don’t (and may never) actually make any money by most accounts.

    My other issue with the presentation was bringing up the Costco model (of passing windfall profits back to customers) on one page and then using a 5%-10% EBIT margin several pages later on the valuation page. Costco operates around 3% EBIT. If we used a 2% net income margin long-term for zooplus (~ 40% effective tax rate) and assume an ambitious 15% per year revenue growth rate the next ten years (growth expected at 18% this year and should trend down over time), I’m not sure there’s enough upside at today’s prices weighted against the downside of competing with Amazon… unless one starts assuming a sale in the interim which is of course possible.

    1. I currently don’t own Zooplus, but I think it’s an interesting business. It’s on my watchlist and I’m spending time learning more about it.

  2. ROIC or ROE with manageable leverage is one my key performance indicators when picking stocks. Sometimes I replace earnings with freecash flows which also does pretty well. Thanks for amazing post as always!

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