Looking Into Advanced Drainage Systems's Return On Invested Capital

According to Benzinga Pro data Advanced Drainage Systems WMS posted a 2.42% decrease in earnings from Q2. Sales, however, increased by 1.26% over the previous quarter to $715.36 million. Despite the increase in sales this quarter, the decrease in earnings may suggest Advanced Drainage Systems is not utilizing their capital as effectively as possible. Advanced Drainage Systems reached earnings of $76.31 million and sales of $706.47 million in Q2.

Why Is ROIC Significant?

Earnings data without context is not clear and can difficult to base trading decisions on. Return on Invested Capital (ROIC) helps to filter signal from noise by measuring yearly pre-tax profit relative to invested capital by a business. Generally, a higher ROIC suggests successful growth of a company and is a sign of higher earnings per share in the future. In Q3, Advanced Drainage Systems posted an ROIC of 6.93%.

It is important to keep in mind that ROIC evaluates past performance and is not used as a predictive tool. It is a good measure of a company's recent performance, but does not account for factors that could affect earnings and sales in the near future.

For Advanced Drainage Systems, the positive return on invested capital ratio of 6.93% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.