The Market Crafters — Concepts
ROIC vs WACC
The single most important spread in value investing. When a company earns more than it costs to fund itself, it creates wealth. When it doesn't, it destroys it.
The Two Numbers
ROIC
Return Metric
Return on Invested Capital
How efficiently a company generates profit from every dollar of capital deployed — equity plus debt. A high ROIC signals a durable competitive advantage, or moat.
ROIC = NOPAT ÷ Invested Capital
WACC
Cost Metric
Weighted Average Cost of Capital
The minimum return a company must earn to satisfy all its capital providers — both shareholders and debt holders. It's the hurdle rate every investment must clear.
WACC = (E/V × Re) + (D/V × Rd × (1−T))
Interactive Calculator
Value Creation
With ROIC above WACC, every dollar invested compounds above the cost of capital — the company is creating shareholder value with each reinvestment cycle.
What the Spread Tells You
📈
ROIC > WACC
The company creates economic value. Every dollar reinvested earns above its cost. Seek wide, durable spreads — this is where compounding lives.
⚖️
ROIC = WACC
Break-even economics. The company covers its cost of capital but creates no excess value. Growth neither helps nor hurts shareholders at the margin.
📉
ROIC < WACC
Value destruction. Each reinvestment cycle erodes capital. A low P/B ratio may look cheap, but the business is burning wealth — a value trap in disguise.
Real-World Scenarios
| Company Type |
ROIC |
WACC |
Spread |
Signal |
Interpretation |
| Wide-moat compounder |
28% |
9% |
+19% |
Strong Buy |
Exceptional moat, reinvest aggressively |
| Quality growth co. |
16% |
10% |
+6% |
Buy |
Healthy spread, watch for dilution |
| Mature cyclical |
11% |
11% |
0% |
Neutral |
Fair value creation, price-dependent |
| Capital-heavy retailer |
8% |
12% |
−4% |
Caution |
Destroying value, needs turnaround |
| Distressed operator |
3% |
14% |
−11% |
Avoid |
Severe value trap, avoid growth |
"The single best indicator of whether a business is a great investment is its ability to earn returns on capital well above the cost of that capital, for a long time."
Core Principle — The Market Crafters
