No. of Recommendations: 7
Jim, have you backtested related approaches using ROIC instead of ROE, or using both as screening criteria together? I’m curious how that changes the results, since ROIC is less affected by leverage and may better reflect the underlying economics of the business.
In theory you could use something like 2-3 year change in operational assets (total assets minus excessive cash, say), versus change in cash flow from operations in the same period. But there are just so many moving parts---were the start and end periods typical years or unusually bad/good? M&A? Are they in a weird business, or just a plain product or service company?
In short, I tried but fairly quickly gave up. It's too hard to measure numerically in a screen, and too high a fraction of firms have had some event that makes the numbers odd.
I *definitely* look at it when I'm evaluating a single company in detail.
Jim
