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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Return on Total Capital

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Market
Industrials (^DJI):
Transports (^DJT):
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Nasdaq (^IXIC):
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As of 02/24/2017
20,822 11.44 0.1%
9,422 86.07 0.9%
699 10.33 1.5%
5,845 9.80 0.2%
2,367 3.53 0.1%
YTD
5.4%
4.2%
6.0%
8.6%
5.7%
Tom's Targets    Overview: 02/14/2017
21,150 or 20,000 by 03/15/2017
8,800 or 9,700 by 03/01/2017
700 or 640 by 03/01/2017
5,950 or 5,650 by 03/01/2017
2,400 or 2,260 by 03/01/2017
Indus strength: None YTD
Mutt Losers: None YTD
Mutt Winners: None YTD

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

My book, Fundamental Analysis and Position TradingFundamental Analysis and Position Trading: Evolution of a Trader book., discusses fundamental analysis, including such as factors as the P/E ratio, book value, debt, and so on.

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This page reviews results from a study of return on total capital.

Return on Total Capital Summary

Value Line defines the return on total capital as "annual net profit plus 1/2 of annual long-term interest divided by the total of shareholders's equity and long term debt." Shareholders's equity is the net worth of the company.

A study of the return on total capital (ROTC) shows that stocks with a low return (below the median of all stocks studied) outperformed those with higher ROTC ratios 57% of the time. In other words, if you bought a stock with a low return on capital at the start of the year and held it from 1 to 5 years, you would have made more money 57% of the time when compared to those stocks with a higher return on total capital. This better performance is especially true during a bear market and for a year or two after the bear market ends. However, additional samples may change the results.

I consider the 57% number as near random. Other fundamental analysis ratios predict better performance.

Return on Total Capital Methodology

I used the Value Line investment survey and typed in their return on total capital percentages to build a database of 178 stocks with data ranging from 12/30/1991 to 7/11/2008.

After completing the database, I logged the close-to-close price change from 1 to 5 years out, looking forward from the base year. The base year ranged from 1992 to 2006. Not all stocks covered the entire range. Years with no numbers were excluded. The price change measured from the close on the last trading day of each year unless the value was unavailable (in which case, I used the start of the new year). Years 2008 and later are not included since the year had not completed as of the time of this study.

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Return on Total Capital Results

The following table shows the results of return on total capital (ROTC) versus performance over time.

Base YearROTCMedian ROTC1 year2 years3 years4 years5 yearsSamples
1998High13.3%19.3%15.7%12.1%5.9%11.5%61
Low23.8%12.1%8.7%3.3%11.4%62
1999High11.95%3.0%7.9%0.0%8.5%11.5%66
Low-8.8%-7.9%-8.2%0.3%6.1%66
2000High12.8%7.3%-3.5%7.8%11.1%10.9%66
Low-2.4%-5.4%7.1%13.8%18.2%66
2001High11%-11.0%6.9%11.0%12.3%13.1%66
Low-10.4%12.7%21.2%22.3%23.9%69
2002High10.4%31.9%25.9%20.2%20.3%11.8%67
Low38.2%40.5%40.1%38.0%39.4%69
2003High10.7%13.8%9.8%10.3%7.3%70
Low31.0%29.7%29.1%26.3%74
2004High11.7%20.5%16.6%14.8%78
Low17.0%18.4%17.8%79
2005High12.85%12.3%11.8%82
Low17.0%11.3%82
2006High13.5%11.2%84
Low5.0%87

Let's take an example using 2006. Stocks with a return on total capital above the median 13.5% had gains averaging 11.2% in 2007 compared to gains of 5.0% for stocks with return on total capital at or below the median. No more results appear for that row because the years had not ended when the study was done. There were 84 and 87 samples that qualified for the study.

Notice that the bear market years of 2001 to 2003 (and the follow-on year of 2004) have the low return on total capital showing future outperformance when compared to the high return on total capital. If you add up the winners and losers of the 35 test periods, you will find that the low return on total capital beats the high return category 57% of the time. I consider that "near random," although the bear market years tend to show above average results, perhaps due to low sample counts.

I consider these results preliminary since I intend to expand the database and then publish my findings.

-- Thomas Bulkowski

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Q: Why do men like love at first sight? A: It saves them a lot of time.