The ROIC Over WACC Measurement

Sammanfattning: McKinsey and Koller et al. (2020) argue that value creation in a company stems from earning a Return on Invested Capital (ROIC) above the Weighted Average Cost of Capital (WACC). This study investigates whether a high ROIC minus WACC measurement is associated with abnormal returns on the OMX Stockholm Large Cap. The companies were sorted into five portfolios in the test, depending on their ROIC over WACC percentage points. Then, the monthly return on the portfolios between the years 2004-2020 were analyzed through regression analysis. The findings are suggestive but not conclusive that applying the measurement to stock picking does not yield a higher return. This is in line with the theories of efficient capital markets. The study also suggests no correlation between the SPREAD and the Sharpe-ratio. However, a significant negative correlation between SPREAD and the standard deviation of returns was found.