CROIC ROIC Screen Strategy Backtest

Written by

Jae Jun

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What You Will Learn

  • What CROIC is and how to use it
  • Why you should think about using CROIC in your analysis of stocks
  • The performance difference between ROIC and CROIC

Stock Screen Strategy and Backtest Series

Value Investing Screens

One of the most lacking aspects to all the widely available screens such as Yahoo, MSN, Morningstar etc are detailed screen criterias. They are all based on PE, PB, PS, ROE, BV and so on which don’t really help you find better investments than the next person.

This is where the Old School Value screeners try to fill this void. I’ve been working hard to come up with new value investing screen criterias and formulas to find the best strategies and opportunities.

One such strategy that I am very confident in is the CROIC screener.

CROIC – Cash Return on Invested Capital

As discussed in the previous CROIC and ROIC article, the formula for CROIC is shown below.

CROIC = FCF/Invested Capital

Invested Capital = Total Equity + Total Liabilities – Current Liabilities  – Excess Cash

Excess Cash = Total Cash – MAX(0,Current Liabilities-Current Assets)

CROIC and ROIC Above 10% Screen Strategy

In this test, I tried two different strategies.

The first one was where a portfolio of 15 stocks were selected based on the current year and prior 2 years CROIC and ROIC being above 10%. Anything less than 10% didn’t make the screen.

I always tend to try and find companies with CROIC in the sweet spot which is usually above 10% as it indicates a strong executive team and company.

In the NCAV screen and NNWC screen, I only selected companies that had trading volumes above 30k, but for CROIC, since many of the companies are not illiquid micro caps, I’ve lowered the volume criteria to 20k.

CROIC and ROIC Above 10% Criteria

  • CROIC and ROIC is greater than 10% for the past 3 years
  • No OTC and financial stocks
  • 15 stocks max in portfolio
  • Volume is greater than 20k
  • Slippage set to 1%
  • Rebalance frequency set to 6 months
  • Test period of 3 year time-frames

CROIC and ROIC Above 10% Results

The results show that companies able to produce high returns will beat or be consistent with the market. There is a good amount of volatility involved but the results are very respectable except for the 2007-2010 period where it just kept up with the market.

Over a 9-10 year period, the result is outperformance by a huge margin for the CROIC strategy but looking at the screen in different time frames, you wouldn’t have known.

Then it dawned on me that everyone looks for the above average companies. So I modified some more formulas and criterias to get the next screen.

CROIC and ROIC Increasing for 3 Years Screen

In the second screen, I removed the minimum CROIC and ROIC limit. This means that any company can make the screen, even if the CROIC and ROIC is negative. But my reasoning is that regardless of what the actual CROIC and ROIC numbers are, if the company has been increasing this metric for the past 3 years, the business is not only improving but management has done a good job of turning the boat around.

In other words, the screen should result in successful turnarounds which are often explosive opportunities.

Before I explain further, click on the image below to get the best investment checklist that will help organize your thoughts and make things easier for you.  

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CROIC and ROIC Increasing Screen Criteria

  • CROIC and ROIC has increased each year for the past 3 years
  • No OTC and financial stocks
  • 15 stocks max in portfolio
  • Volume is greater than 20k
  • Slippage set to 1%
  • Rebalance frequency set to 6 months
  • Test period of 3 year time-frames

CROIC and ROIC Increasing Screen Results

As you can see, this second screen completely annihilates the first screen.

Assuming you followed this strategy the only down period would have been from 2007-2010 but overall had you started in 2001, your $100 would have grown to $850 by 2010 using the CROIC method and $385 using the ROIC method.

One thing is for sure on both accounts. CROIC is a much better indication of performance and better metric even in a screener.

I also added another criteria where FCF is increasing each of the past 3 years which also yield great results which I won’t display here as the results are very similar to above.

I’ll be looking at FCF related screens and strategies in the next strategy review but first, here are the companies that showed up in the screen.

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