Free tool · No signup · Live ticker data
Capital Allocation Grader
Grade how well a company deploys its cash. Enter any ticker to score ROIC vs. WACC, net buyback yield, dividend coverage, R&D efficiency, and M&A track record — with a plain-English verdict.
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 — how management deploys cash between reinvestment, buybacks, dividends, and acquisitions — is the single biggest driver of long-term shareholder returns. This tool scores it in 30 seconds.
Try: AAPL · MSFT · BRK-B · NVR · CSCO
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 — even if earnings per share are rising.
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. A company with 25% ROIC earns $0.25 of profit per dollar invested — before it even touches leverage. 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: Rf + β × ERP) and the after-tax cost of debt into a single hurdle rate. Every reinvestment decision should clear this hurdle.
This tool estimates WACC using market beta, a 4.5% risk-free rate, and a 5.5% equity risk premium. The exact number varies — but the direction is what matters. If ROIC is 18% and WACC is somewhere between 8–12%, the business is clearly creating value regardless of the precise WACC.
Buybacks: the double-edged tool
Buybacks create value when a company repurchases stock below intrinsic value — this is Buffett's test. When Apple buys back stock, it's allocating capital the same way it would evaluate any business acquisition: is this the best use of cash given the expected return? Buying back stock at 30× P/E is questionable; buying at 10× when the business is undervalued is excellent.
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. Watch for companies that announce large buybacks while issuing shares aggressively.
Dividends: commitment or obligation?
Dividends are commitments. Unlike buybacks, cutting a dividend sends a severe signal to the market. This is why 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.
A company with no dividend isn't necessarily worse — Apple returned capital entirely through buybacks for decades. The question is whether management is the right allocator of the retained cash, or whether shareholders would be better served receiving it directly.
Goodwill: the M&A truth serum
Every acquisition at a premium generates goodwill on the balance sheet — the gap between what was paid and what book value was acquired. 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: if those acquisitions underperform, goodwill must be written down, wiping out years of reported earnings overnight.
Rising goodwill combined with flat or declining revenue is the clearest sign of value-destructive M&A. The company is paying more to grow inorganically while not generating returns from prior deals. Look for organic revenue growth versus acquisition-driven growth in the notes to the financial statements.
The best capital allocators
The best capital allocators in history 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 with a clear strategic rationale. 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.
Most CEOs are not capital allocators by training — they're operators, engineers, or salespeople promoted from within. The capital allocation grade gives you a systematic way to evaluate whether the person running the business understands the difference between growing revenue and creating shareholder value.
How capital allocation grading works
Capital allocation grading distills five financial dimensions into a single A–F score. Each dimension tests a different aspect of how management deploys cash — and whether that deployment creates or destroys shareholder value.
ROIC vs. WACC: the value creation test
The spread between Return on Invested Capital and Weighted Average Cost of Capital is the foundation of the entire grade. A company earning 22% ROIC with a 10% WACC creates 12 percentage points of value annually — every dollar reinvested compounds wealth. A company earning 8% ROIC with a 10% WACC destroys 2 points per year — growth actually makes shareholders poorer. A company buying back stock while ROIC sits below WACC is destroying value twice: poor operating returns plus capital spent on shares instead of fixing the business.
Buyback quality: net yield, not headlines
Gross buyback announcements are marketing. Net buyback yield — shares repurchased minus shares issued through equity compensation, divided by market cap — reveals the real shareholder return. A company spending $5B on buybacks while issuing $4B in stock options returns only $1B to shareholders. The grader penalizes net diluters and rewards companies that genuinely shrink their share count over time.
Dividend coverage: sustainability over yield
A high dividend yield means nothing if free cash flow cannot support it. The grader measures FCF coverage ratio — how many times free cash flow covers the annual dividend payout. Coverage above 2× is healthy; coverage below 1× means the dividend is funded by debt or asset sales, a pattern that ends in a cut. Companies with no dividend are scored on reinvestment efficiency instead.
Debt management and M&A discipline
Goodwill as a percentage of total assets reveals a company's acquisition history. Serial acquirers with 40–60% goodwill/assets carry impairment risk — if acquired businesses underperform, goodwill writedowns erase years of reported earnings overnight. Rising goodwill without corresponding revenue growth is the clearest signal of value-destructive M&A. The best capital allocators grow organically and acquire only at disciplined prices.
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 |
| Overall Pattern | Earns high returns, returns excess cash, avoids empire-building | Overpays for acquisitions, dilutes shareholders, funds dividends with debt |
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. They reinvest when returns exceed cost of capital, buy back stock when it trades below intrinsic value, and return cash to shareholders when internal opportunities are scarce. Poor capital allocators do the opposite: they empire-build through overpriced acquisitions, buy back stock at peak valuations, and maintain dividends they can't afford from operations.
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: is the company earning above its cost of capital? (2) Net buyback yield — are share repurchases actually reducing the share count after equity compensation? (3) Dividend FCF coverage — is the payout sustainable from operating cash flow? (4) R&D or reinvestment efficiency — is spending converting into revenue growth? (5) Goodwill as a percentage of total assets — how much acquisition premium sits on the balance sheet? Grades map to scores: A = 82+, B = 64–81, C = 46–63, D = 34–45, F below 34. An A-grade company creates value across most dimensions; a D-grade company destroys value in multiple areas.
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 — equity and debt combined. 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. A company earning 22% ROIC with a 10% WACC creates 12 percentage points of value annually. A company earning 8% ROIC with a 10% WACC destroys 2 points of value with every dollar it reinvests — shareholders would be better off if management returned the cash instead.
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 (FCF / dividends paid). Coverage below 1× means the company is funding its dividend with debt or asset sales — a situation that inevitably ends in a cut. Beyond coverage, good dividend policy is context-dependent. Companies with high ROIC and reinvestment opportunities (like early-stage tech) should retain and reinvest cash rather than pay dividends. Mature businesses with limited reinvestment options (utilities, consumer staples) should return excess cash via dividends. The worst dividend policy is maintaining a payout the business can't afford to signal stability — the eventual cut causes more damage than never paying one at all.
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 — mechanically boosting stock price, all else equal. However, buybacks only create value when the stock is purchased below intrinsic value. A company buying back stock at 30× earnings while ROIC is below WACC is destroying value twice: once by reinvesting at poor returns, and again by overpaying for its own shares. Net buyback yield — which subtracts new shares issued through equity compensation — reveals the true picture. Many tech companies announce $5B+ buyback programs while quietly issuing $3–4B in stock-based compensation, resulting in minimal net share reduction. Always check net buyback yield, not gross repurchases.
How do I compare capital allocation between two stocks?
Enter the first ticker and click Grade, then click the 'Compare with another stock' button to add a second ticker. The tool displays a side-by-side comparison grid showing the overall A–F grade and all five scoring dimensions — ROIC vs WACC, buyback quality, dividend policy, capital efficiency, and debt management — for both companies. Each row highlights which company scores higher on that dimension with a visual indicator, making it easy to see relative strengths and weaknesses at a glance. The comparison is shareable via URL: add ?ticker=AAPL&compare=MSFT to the page address to pre-load any two tickers. Use the 'Share comparison' button to copy a branded link ready to paste on social media or in a research note.