Nathan Lim, Portfolio Manager at Australian Ethical Investors, says measuring how effectively shareholder funds are being used is essential in his investment...

Nathan Lim, Portfolio Manager at Australian Ethical Investors, says measuring how effectively shareholder funds are being used is essential in his investment process. When we asked which was his preferred financial ratio this was the response that he gave. Return on Invested Capital minus Weight Average Cost of Capital > 0. If a company cannot earn a return that satisfies the needs of both equity and debt holders, it is destroying value. As such, it should reconsider its strategy or return the capital to shareholders. This metric has the added benefit of being easily applied to any company as it answers the first basic question, is the business using the capital others have entrusted it efficiently.