Looking Into Exelixis's Return On Invested Capital

Pulled from Benzinga Pro data, Exelixis EXEL posted Q3 earnings of $73.21 million, an increase from Q2 of 3.59%. Sales dropped to $411.74 million, a 1.83% decrease between quarters. In Q2, Exelixis earned $70.67 million, whereas sales reached $419.43 million.

What Is ROIC?

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, Exelixis posted an ROIC of 3.32%.

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.

ROIC is a powerful metric for comparing the effectiveness of capital allocation for similar companies. A relatively high ROIC shows Exelixis is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of invested capital, some of that money can be reinvested in more capital which will generally lead to higher returns and, ultimately, earnings per share (EPS) growth.

For Exelixis, the positive return on invested capital ratio of 3.32% 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.