What percentage of companies could have a consistent lower "return on capital" to its owners/shareholders and a higher risk than the S&P 500?

Question

What percentage of companies/startups in the US or any other country could have a consistent lower "return on capital" to its owners/shareholders and at the same time a higher risk than the S&P 500 with reinvested dividends?

I find it illogical why would someone continue with operating such a business, but at the same time it wouldn't surprise me much.

I couldn't find any academic/professional research/estimates on that.

Please mind that the "return on capital" is a basic accounting metric, taught early on in accounting/finance/business/management degrees, perhaps if you had to google what it means or how to calculate it, then please consider not answering.

Answer 1

Businesses have cycles. Young companies have horrible return on capital rates because they're fundraising for capital expenses and expansion which would crush profits to the extent there are even profits. Your theory is essentially, no one should ever invest in a startup because ROIC of a startup is terrible. But at one point, Google was a startup.

If you think investing only in high ROIC companies is a solid investing theory, that's fine. The S&P 500 is just the 500ish largest public US companies with no regard for industry, profitability, or any other metric. Common ROIC rate ranges vary by company and industry, as do other metrics. Some industries are very capital asset heavy, some are very debt heavy, etc. If you want to restrict your investable companies to a certain debt to asset ratio (as an example), that's fine but you will by almost default filter out entire industries because in some industries a lot of debt is common. The S&P 500 index doesn't concern itself with these measurements, for better or worse.

No metric is meaningful in a vacuum. A metric exists for comparison purposes and you generally need multiple points of comparison to even begin to understand a company's situation.