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MOIC: Investing Holy Grail

Rubén Briones


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Many investors are looking for the holy grail of investing. They all want a magic formula that tells them which stocks to buy, and which ones to sell. But experienced investors know that there is no such a thing. I was convinced of it… until I discovered the MOIC formula.


Multiple on Invested Capital (MOIC) is a metric used to describe the performance of an investment relative to its initial cost. The MOIC tells us how many times we have multiplied our initial investment. Its formula is very simple:

\(\textrm{MOIC}\ =\dfrac{\textrm{Total Value}}{\textrm{Invested Capital}}\)

For example, if we invest $100 and in 5 years our investment is worth $300, our MOIC would be 3x.

As we can see, MOIC does not take into account time, in our example, the MOIC would be the same even if our investment reached $300 in only 1 year. For investors with limited capital this does not make much sense, does it? The solution is the IRR.


The Internal Rate of Return (IRR) takes into account the time of the investment. So, it indicates the return obtained in a certain period of time. The formula to convert a MOIC into an IRR would be:


In our example above the IRR would be 24.57% annualized.

Investing Holy Grail

MOIC is a very common metric in the private equity industry, but it is hardly used in the public equity community. But what if I told you that it can be used to explain the return of any listed stock? You don’t believe me? Keep reading…

The MOIC of a stock can be approximated with the following formula:

\(\textrm{MOIC Stock}\ =\dfrac{\textrm{P/E}_{ t}}{\textrm{P/E}_{ t-1}} * \dfrac{\textrm{Earnings}_{ t}}{\textrm{Earnings}_{ t-1}} * \dfrac{\textrm{Shares Outstanding}_{ t-1}}{\textrm{Shares Outstanding}_{ t}} \)

A stock’s return can be explained by the expansion of its valuation multiple, the growth of its earnings and its share buybacks.

And then to calculate the IRR, simply apply the above formula and add the average annual dividend yield:

\(\textrm{IRR Stock}=\textrm{MOIC Stock}^{(1/years)}-1 + \textrm{Dividend Yield}\)

Let’s see it with an example.

Apple ($AAPL) was trading at about $36.5 in Sept’17 and 5 years later, in Sept’22 (Apple’s fiscal year ends in Sept), it trades at about $150 (adjusting for dividends and splits), which gives an IRR of 32.7% per year…which totally matches the 33.1% given by the MOIC formula!

MOIC calculation for Apple (Earnings in B, ShsOuts in MM)
MOIC calculation for Apple (Earnings in B, ShsOuts in MM)

Okay, GG.

But what good is this to me? I want to estimate future returns, not past returns…

Projecting future returns

All right, let’s see if all this helps us to do something really useful (making money). To do so, we are going to run a deciles simulation for the S&P 500 universe, from 2005 to the present. We will construct the deciles as follows:

  1. For each day take the components that were in the S&P 500 on that day.
  2. Calculate their estimated MOIC, with the following assumptions:
    • The future P/E will be equal to the average P/E of the last 5 years.
    • Earnings will keep growing (or shrinking) at the same rate as they have been doing for the last 5 years.
    • Companies will continue to buyback (or issue) shares at the same rate as they did during the past 5 years.
  3. Divide the companies into deciles according to their projected IRR.
    • Assuming that the dividend yield will remain constant.
  4. Construct ten equally weighted portfolios with the stocks of each decile.


The next chart shows the cumulative return of each decile portfolio. The greenest are the portfolios with the stocks with the highest upside potential according to our MOIC estimation, and the reddest are the portfolios with the stocks with the lowest appreciation potential:

MOIC deciles portfolios equities
MOIC deciles portfolios equities

Looks pretty good, doesn’t it? Stocks for which we have estimated a higher MOIC outperform stocks with lower expected MOIC, in a clear and systematic way.

Finally, let’s check the main statistics of each portfolio, to verify that the differences in returns are not due to higher risk:

MOIC deciles portfolios stats
MOIC deciles portfolios stats

We can see that it is not only that the best decile does much better than the worst decile, but also that the first decile clearly beats the S&P 500 Equally Weighted. Stocks with higher estimated IRR perform 5% better than the benchmark, with lower drawdowns and higher run ups.

If MOIC is not the investing holy grail… at least it’s very close, right? Well, it’s not. Sorry to disappoint you, but there is not such a thing. Even MOIC is not.

These results, as good as they are, are just a simulation. First of all, we would have to make sure that we have not overfitted, and that the strategy is robust over time and in different markets. And, above all, we must be aware that any source of alpha will eventually disappear, it may last more or less, but any signal is destined to die.

So don’t be fooled, the holy grail of investing is not any signal, nor any strategy, but the (scientific) method used to build and validate them. And that, nobody is going to give it to you for free in a blog post 😉

Thanks for reading.

[GIFT]: MOIC calculator template

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