The kids are back in school; my family is back in a routine. The days come and go, and Halloween, Thanksgiving, Christmas and the New Year will be here before we know it. Each day I try to ask my kids how their day went and usually get the standard reply of “Good.” To prompt a conversation that would hopefully extend beyond a one-word response, I started asking them a different question instead. What interesting question did you ask at school today? We'll see how it goes as my8-year-old quipped "I don't ask questions. I answer them." Seven words is better than one. Progress.
And while reflecting on how fast time flies, especially when you’re back in a routine, I tend to go back to the Sunday articles I’ve written since starting them last Spring. I review them often to remind myself about the concepts and ideas that the team and I at UVstocks.io have explored as well as the interesting questions we’ve asked along the way in our constant pursuit of unlocking investor insights.
Looking back at each week in May when we covered a different value metric reported by UVstocks and how the metrics can be used to help our subscribers find undervalued stocks, I’m reminded of other useful ratios that include the “Return on X” (ROX) ratios such as ROI, ROA, ROE, ROC and ROS.
According to Investopedia.com:
ROI: Return on Investment (ROI) is a popular profitability metric used to evaluate how well an investment has performed.
ROA: Return on assets (ROA) is a ratio that indicates a company’s profitability relative to its total assets.
ROE: Return on equity (ROE) measures a corporation's profitability in relation to stockholders’ equity.
ROC: Return on capital (ROC) measures the same as ROE but also includes debt financing in addition to equity.
ROS: Return on sales (ROS) is a measure of how efficiently a company turns sales into profits.
These ratios are all about a company’s ability to generate a profit and how efficient it is at using available resources (e.g., investments, assets, shareholder equity, capital/debt and generated sales) to do so.
Moving forward in time to one of the July articles, we talked about the 10xer companies featured in Great By Choice by Jim Collins and Morten T. Hansen. You may recall that over the course of 15 years the 10xers were able to sustain spectacular yet consistent outperformance relative to the general stock market, despite being small and/or young startups operating within volatile and unpredictable environments. We asked how we could find the future 10xers within the Russell 2000 small cap index.
As it happens, one critical ratio that 10xers have in common that doesn’t show up on the Investopedia website is something called Return on Luck (ROL). According to Jim Collins and his team’s research, great companies were not generally luckier than the comparisons—they did not get more good luck, less bad luck, bigger spikes of luck, or better timing of luck. Instead, they got a higher return on luck, making more of their luck than others. The critical question is not, Will you get luck? But What will you do with the luck you get?
“ROL might be an even more important concept than return on assets (ROA), return on equity (ROE), return on sales (ROS), or return on investment (ROI).” — Jim Collins and MortenT. Hansen
Here’s an interesting question that I’m going to ask today:
Is there a way to quantify Return on Luck (ROL) by looking at company financial statements or other publicly available sources just as you would when calculating standard ROX ratios?
I’d be interested in what you guys think. Feel free to reach out.
P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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