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Capital Allocation Grader
Grade any stock's capital allocation: ROIC vs WACC, buyback yield, net payout yield, and dividend coverage. A-F grade with verdict. Free, no signup.
Analyze a company
What this grades
- ROIC vs WACCIs the business earning above its cost of capital?
- Buyback qualityNet repurchaser or net diluter?
- Dividend coverageFCF vs dividend — is the payout sustainable?
- R&D / reinvestmentIs spending converting to growth?
- M&A track recordGoodwill as % of assets — serial acquirer risk
Results
Enter a ticker to grade capital allocation
Capital allocation \u2014 how management deploys cash between reinvestment, buybacks, dividends, and acquisitions \u2014 is the single biggest driver of long-term shareholder returns. This tool scores it in 30 seconds.
Try: AAPL \u00b7 MSFT \u00b7 BRK-B \u00b7 NVR \u00b7 CSCO
Why capital allocation is the most under-analyzed driver of stock returns
Most investors fixate on revenue growth and earnings beats. But the companies that compound wealth over decades — Berkshire Hathaway, Constellation Software, Danaher — share one trait that matters more than any single quarter: disciplined capital allocation. Every dollar of free cash flow faces a decision: reinvest in the business, acquire another company, buy back shares, pay dividends, or pay down debt. The CEO who consistently makes the right call at the right price creates exponential value.
Capital allocation grading gives you a systematic way to measure this. Instead of relying on management's narrative about “returning value to shareholders,” you can check the numbers: Is ROIC actually above WACC, or is growth destroying value? Are buybacks shrinking the share count, or is equity compensation canceling them out? Is the dividend covered by free cash flow, or funded by borrowing?
How to use this capital allocation grader
Enter a ticker
Type any US-listed ticker and click “Grade.” The tool fetches income statements, balance sheets, and cash flow data — then calculates ROIC, WACC, buyback yield, and all five dimensions automatically.
Check the ROIC vs. WACC spread
This is the most important number. A positive spread means management is creating value with every dollar reinvested. A negative spread means growth is actually destroying value.
Read the dimension breakdown
Five dimensions — ROIC, buyback quality, dividend coverage, reinvestment efficiency, and M&A track record — each scored 0–20. The weakest dimension is where to focus your due diligence.
Use the verdict as a starting point
The grade is a screen, not a buy/sell signal. An A company with a 30× P/E may be overpriced; a C company that's improving rapidly may be a turnaround opportunity. Combine with the DCF and P/E calculator for a full picture.
Capital allocation explained
ROIC: the most important number in business
Return on Invested Capital measures how much profit a company generates for every dollar of capital deployed. The legendary businesses — Visa, NVR, Constellation Software — consistently earn ROIC of 30–60% because they have pricing power, low capital requirements, or network effects that prevent competition from eroding returns.
The spread over WACC matters more than the absolute level. A company earning 15% ROIC with an 8% cost of capital is creating 7pp of value per year. A company earning 15% with a 16% cost of capital is destroying value. Same ROIC, opposite outcome.
WACC: what capital actually costs
The cost of equity is not free. Shareholders expect a return above the risk-free rate for accepting the risk of equity ownership. WACC combines the cost of equity (estimated via CAPM) and the after-tax cost of debt into a single hurdle rate. Every reinvestment decision should clear this hurdle.
Buybacks: the double-edged tool
Buybacks create value when a company repurchases stock below intrinsic value. Net buyback yield adjusts for equity compensation. A company that spends $5B on buybacks but issues $4B in employee stock options returns only $1B to shareholders — a very different picture than the headline repurchase number.
Dividends: commitment or obligation?
Dividends are commitments. Unlike buybacks, cutting a dividend sends a severe signal to the market. Dividend coverage — FCF divided by dividends paid — is the most important dividend metric. Coverage above 2× gives management room to maintain the dividend through a downturn. Coverage below 1× means the company is paying a dividend it can't afford from operations.
Goodwill: the M&A truth serum
Every acquisition at a premium generates goodwill on the balance sheet. Goodwill as a percentage of total assets reveals a company's M&A history. Serial acquirers with 40–60% goodwill/assets carry enormous integration and impairment risk. Rising goodwill combined with flat or declining revenue is the clearest sign of value-destructive M&A.
The best capital allocators
The best capital allocators share common traits: high ROIC with a moat protecting it, disciplined buybacks when the stock is cheap, no dividend when internal investment returns are superior, and M&A at disciplined prices. Henry Singleton of Teledyne repurchased 90% of outstanding shares when valuations were cheap. Buffett's Berkshire has compounded at 20%/year for 60 years by doing the same.
What separates an A-grade from a D-grade
| Metric | A-Grade Company | D-Grade Company |
|---|---|---|
| ROIC vs WACC | ROIC 20%+ with 10pp+ spread over WACC | ROIC below WACC — growth destroys value |
| Net Buyback Yield | 3%+ net yield — share count declining | Net diluter — equity comp exceeds buybacks |
| Dividend Coverage | 2.5×+ FCF coverage or no dividend with high reinvestment returns | Below 1× — dividend funded by debt, cut risk is high |
| R&D / Reinvestment | R&D converts to revenue growth; high FCF conversion | Heavy spend with flat or declining revenue |
| Goodwill / Assets | Under 10% — organic growth focused | 40%+ — serial acquirer with impairment risk |
Frequently asked questions
What is capital allocation?
Capital allocation is how a company's management decides to deploy cash flow. Every dollar of free cash flow faces five competing uses: reinvesting in the business (capex, R&D), buying back shares, paying dividends, making acquisitions, or paying down debt. The best CEOs — Warren Buffett, Henry Singleton, Mark Leonard — treat capital allocation as their primary job.
How do you grade a company's capital allocation?
This grader scores five dimensions, each worth 0–20 points for a 100-point total. (1) ROIC vs WACC spread — the core value creation test. (2) Net buyback yield — are share repurchases actually reducing the share count after equity compensation? (3) Dividend FCF coverage — is the payout sustainable? (4) R&D or reinvestment efficiency. (5) Goodwill as a percentage of total assets. Grades map to scores: A = 82+, B = 64–81, C = 46–63, D = 34–45, F below 34.
What is ROIC vs WACC?
ROIC (Return on Invested Capital) measures profit generated per dollar of capital deployed. WACC (Weighted Average Cost of Capital) is the blended rate a company pays for its financing. The spread between them is the single most important number in capital allocation: ROIC above WACC means every reinvested dollar creates value; ROIC below WACC means growth actually destroys value, even if earnings are rising.
What makes a good dividend policy?
A good dividend policy starts with sustainability: the dividend should be comfortably covered by free cash flow, ideally at 2× coverage or better. Coverage below 1× means the company is funding its dividend with debt or asset sales — a situation that inevitably ends in a cut. Companies with high ROIC and reinvestment opportunities should retain and reinvest cash rather than pay dividends.
How do share buybacks affect stock price?
Share buybacks reduce the number of shares outstanding, which increases earnings per share and each remaining shareholder's ownership stake. However, buybacks only create value when the stock is purchased below intrinsic value. Net buyback yield — which subtracts new shares issued through equity compensation — reveals the true picture. Many tech companies announce large buyback programs while quietly issuing nearly as much in stock-based compensation.
What is buyback yield?
Buyback yield measures the percentage of a company's market capitalization returned to shareholders through net share repurchases over the past year. It is calculated as (shares repurchased minus shares issued through equity compensation) divided by market cap. A positive buyback yield means the company is shrinking its share count. A negative buyback yield means the company is a net diluter.
What is net payout yield?
Net payout yield is the total cash return to shareholders expressed as a percentage of market cap. It combines buyback yield (net share repurchases / market cap) and dividend yield (annual dividends / market cap) into a single number. A company with a 1% dividend yield and a 4% buyback yield has a 5% net payout yield.
How do I compare capital allocation between two stocks?
Click the 'Compare Two Stocks' tab, enter two US-listed tickers, and click Compare. The tool fetches live data for both companies and displays a side-by-side comparison grid showing the overall A–F grade and all five scoring dimensions. Each row highlights which company scores higher on that dimension. The comparison is shareable via URL: add ?compare=AAPL,MSFT to pre-load any two tickers.
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