THE ROIC-WACC SPREAD AND STOCK RETURNS: AN EMPIRICAL PORTFOLIO STUDY OF NSE-LISTED NON-FINANCIAL FIRMS IN INDIA (FY2017–FY2025)

Abstract

This study investigates whether the ROIC-WACC SPREAD (the difference between a company's Return on Invested Capital and its Weighted Average Cost of Capital) is associated with differences in annual stock returns, return volatility, and risk-adjusted performance among NSE-listed companies in India. The study follows the portfolio sorting methodology developed by Steen and Turesson (2021) and extends their analysis to one of the world's largest emerging equity markets over the period FY2017 to FY2025. A sample of 6 non-financial companies drawn from NSE 500 across thirteen sectors was examined. Financial data including ROIC components and WACC inputs were sourced from Screener.in, NSE India, and the Reserve Bank of India. Stock prices were collected for March 31 of every year from 2016 to 2025. Firms were sorted annually into five equal portfolios based on their three-year rolling Average SPREAD. Portfolio-level performance was assessed on three dimensions: Average annual return, Standard Deviation of returns, and Sharpe ratio. Three OLS regression models were estimated at the portfolio-year level (N = 35), and supplementary firm-level regressions were conducted using all 540 firm-year observations. The descriptive analysis reveals that the Average ROIC of 32.92 percent substantially exceeds the Average WACC of 11.51 percent across the sample, yielding a mean SPREAD of 21.20 percent. Portfolio 1 firms (highest SPREAD) include capital-light businesses in IT, FMCG, and pharmaceuticals with Average ROICs of 85.84 percent, while Portfolio 5 firms (lowest SPREAD) are predominantly from capital-intensive sectors including metals, energy, and cement. The three regression models find no statistically significant association between the SPREAD and any of the three dependent variables. Portfolio 1 earned an Average annual return of 16.31%, the lowest of the five portfolios, while Portfolio 4 earned the highest Average of 26.39%. These findings are consistent with EMH: the superior capital efficiency of high-SPREAD firms is already incorporated into their market prices, leaving no systematic excess return for investors who sort on the basis of the SPREAD. The results align closely with those of Steen and Turesson (2021). However, a firm-level regression on absolute return volatility yields a statistically significant result (β = -0.095, p = 0.029), signifies that higher-SPREAD firms exhibit lower return volatility. This finding constitutes the study's most robust empirical contribution and suggests that the SPREAD functions as a risk indicator rather than a return predictor in the Indian market. The year-by-year analysis further reveals that high-SPREAD firms outperform defensively during market downturns (FY2020: Portfolio 1 returned +1.54 percent versus Portfolio 5's -18.30 percent) but underperform significantly during cyclical recoveries (FY2021: Portfolio 5 returned +121.50 percent versus Portfolio 1's +53.82 percent). The study contributes to international literature on ROIC-WACC framework by providing the first systematic portfolio-sorting test of this relationship in Indian equity market. The findings have implications for investors seeking risk management benefits rather than excess returns, for corporate managers committed to value-based management frameworks, and for academics studying the applicability of capital efficiency metrics in emerging market contexts.