 Good day fellow investors. Today I'm going to discuss a tool return on investment capital that is one of the 25 tools that I will discuss in my book about value investing and if you want to be notified when the book is out please drop me an email and that tool return on capital investment is Charlie Munger's favorite tool and Charlie Munger we know what he has done with Buffett. He has changed Buffett from a pure value investor cigar butt investor to a growth value investor and they together have been looking at a return on investment capital for the last 50 plus years. They did pretty good with 20% returns per year. So today we're going to discuss how to use return on investment capital, what is the importance of it, how to calculate it and how can that help you in your investment process. It's not that difficult as all the things coming from Buffett and Munger are really simple. The main point is to not be stupid and to avoid doing stupid things. If you do that you will do great in your investment life. So return on investment capital shows how well is the company using available capital. It's calculated by using the following formula return on investment capital equals net income divided by capital which is equity plus long-term and short-term debt. You will see many versions of the formula that excludes taxes and interest expenses from net income or goodwill and excess cash from capital. Of course there are many various so you can choose whatever you want. I'll try always to keep it simple in order to be as conservative as I can be. A value investor is always conservative. So let's calculate return on investment capital for two companies Souter company and Apple. In this table I have used the five-year average net income, short-term debt, long-term debt and the stockholders' equity. Return on invested capital for Souter company is 2.18%. Apple, again, average net income, 58 billion, short-term debt, long-term debt, stockholders' equity. I'm not going to take out the cash nothing return on investment capital 20%. If we compare the two stock prices, how they performed during the last 10 years, you can see why return on investment capital is Charlie Munger's favorite investment metric. And he says that it's obvious that if a company generates high returns on capital and reinvests at high returns, it will do well. But this wouldn't sell books, so there's a lot of twaddle and fuzzy concepts that have been introduced and that don't add much. He is talking here about the weighted average cost of capital which is according to him pure BS. Going back to the performance, this is exactly what he is saying. If you invested in the company with a high return on investment capital, you would have done extremely well. No matter at what price you buy it, let's dig more into that. So, Munger says that when you find a good company with a high return on investment capital, you should buy it. Better to own a wonderful business at a fair price than a bad business at a bargain price. Because over the long term, that business will reinvest that capital and do extremely well in the long term. Of course, what Munger means here is that you cannot time the market. Those who invested in Apple in 2009 increased their capital 14 times. But those who invested in 2008 increased their capital 6 times. This shows how important is the return on investment capital. Munger clearly states with this that we cannot know what will happen in the next 10 years. Of course, only few took advantage of 2009 and only few knew it will come. Therefore, it's all a random play. You cannot know if a recession will come tomorrow or it won't come at all in the next 10 years. Therefore, it's always better to invest in a stock with a high return on investment capital. If you multiply your money 5 times, okay, if you multiply it 15 times, even better. However, 5 times is great, 15 times is even better. Therefore, again, return on investment capital, you get yourself a guarantee. Of course, you have to always look at the quality of that return, sustainability, growth management and all the other things that fit into a great investment. To conclude, return on investment capital is an essential metric to use when analyzing a stock. I hope you will add this tool to your skill set when you analyze a company and that it will lead to great returns. Perhaps you won't be a billionaire like Buffett or Munger, but if you are a millionaire or a multimillionaire, I think you will do well and everybody will be happy. Thank you for watching and looking forward to your comments and I'll see you in the next video.