Can a simple ratio expose under-the-radar companies that borrow smart, grow fast, and outperform giants?

In this post, I’ll introduce RoL (Return on Liabilities) - a practical, underrated metric to spot hidden alpha. It’s fast, simple, and brutally honest about one thing:

“Can you turn borrowed money into real profit?”

💡 The Core Idea: Return on Liabilities (RoL)

Most traditional metrics like ROE, ROA, or EBITDA margin focus on profitability in relation to assets or equity. But what if we flip the lens?

What if we ask:

“For every dollar of debt a company holds, how much net profit does it actually generate?”

That’s the essence of RoL:

RoL = Net_Profit / Total_Liabilities

Or for a cleaner version:

RoL_EBIT = EBIT / Financial_Debt

📈 Why RoL Works

Advantage Reason
Cuts through accounting tricks Profit vs debt is harder to manipulate
Filters out “zombie companies” If you’re borrowing money and not making money, you fail
Finds capital-efficient businesses RoL rewards companies who use debt wisely
Helps avoid empty high-ROE traps Some high-ROE firms simply have no debt - but that’s not always a strength

⚠️ Important Warning on Using EBIT in RoL

While RoL_EBIT is powerful for many industries, it has important limitations—especially in sectors like banking, real estate, and financial services.

  • In banks, for example, EBIT includes interest income from loans and profits from foreclosed assets, which may not translate into immediate cash flow. Such “profits” can be accounting constructs rather than realized earnings.
  • Real estate companies might recognize gains on property sales that have long cash conversion cycles, making EBIT less reflective of true cash profitability.
  • These factors can inflate EBIT, causing RoL_EBIT to misrepresent the company’s actual ability to turn debt into real profits.

💡 Alternative Approach: Using Operating Cash Flow (OCF)

To address these issues, consider replacing EBIT with Operating Cash Flow (OCF) when calculating RoL:

RoL_OCF = OCF / Financial_Debt

or if Financial Debt is unavailable, use:

RoL_OCF = OCF / Short-Term Debt (with caution)

Why OCF?

  • OCF measures the actual cash generated from core business operations, stripping away accounting non-cash items and timing effects.
  • It provides a more realistic picture of a company’s ability to service and profit from its debt.
  • This is especially crucial for industries where EBIT can be distorted by accounting policies or asset sales.

🧠 Turning RoL Into a Stock Screener

Step 1: Pick an Industry

Let’s say: Vietnamese Fertilizer Industry

(Example: DPM, DCM, LAS,…)

Step 2: Find the Top 10 Companies by Revenue

These are your “Big Players.”

Calculate RoL_avg_top = average RoL of this group.

Step 3: Compare Every Other Company Against It

If a smaller company has:

  • RoL > RoL_avg_top
  • Stable or growing RoL trend over 3+ quarters
  • Manageable financial debt (not exploding)

If all apply, you’ve found a strong undervalued alpha candidate - one that not only uses debt well, but also:

  • Runs a profitable core business (positive gross margin)
  • Generates real cash (positive OCF)
  • Trades at a discount (low P/E vs peers)

🎯 The Underdog Advantage

Smaller companies with high RoL outperforming industry average are like “leverage ninjas” - they quietly use debt more efficiently than the giants, yet remain underpriced because no one’s watching them.

It’s not about “zero debt” being safe.

It’s about: “If I borrow, do I multiply it into value?”

📊 How to Visualize It

  • Plot RoL (quarterly) over 5 years
  • Compare with industry average
  • Highlight turning points (e.g. when company begins using debt)

Bonus: Create RoL_rel = RoL / RoL_avg_top

  • If RoL_rel > 1: Outperforming average
  • If RoL_rel > 2: Potential mispricing

⚠️ Caveats

Risk Mitigation
Net profit manipulation Use EBIT or CFO as fallback
Liabilities include non-financial debt Focus on financial debt only
Low-debt companies create “fake” RoL spikes Exclude firms with negligible debt (<5% assets)
Liquidity issues in small-cap stocks Check trading volume before acting

🤝 Seeing Through CFO and Accountant - An Investor’s Advantage

To dig deeper than just numbers, investors must understand the different perspectives of a company’s Chief Financial Officer (CFO) and its accountants.

  • The CFO drives the company’s long-term financial strategy. Their focus is managing cash flows, investing in durable assets, and maintaining stable, credible financials that inspire confidence from shareholders and the market. CFOs strive to balance profit growth with prudent risk management, aiming for sustainable success.

  • The accountants ensure every financial transaction is properly recorded and compliant with accounting standards. They emphasize accuracy and transparency, reflecting real-time fluctuations, detailed cost allocation, and regulatory requirements. Accountants’ reports might show more volatility due to strict recognition rules and short-term accounting effects.

From an investor’s viewpoint:

  • When operating cash flow (OCF) aligns well with reported profits, it signals healthy, quality earnings - a strong buy indicator.

  • When profits appear strong but cash flow is weak or inconsistent, it raises red flags about potential accounting gimmicks, inventory issues, or stretched working capital.

Understanding this dynamic is like having a microscope - it lets investors see beyond surface numbers to judge whether profits are genuinely backed by cash and sound financial management or just accounting artifacts.

🧩 Final Thoughts

In a world obsessed with massive balance sheets and high ROE, the real edge may lie in simplicity.

RoL doesn’t tell you everything - but it tells you one thing very clearly:

“Are you good at turning other people’s money into profit?”

If the answer is “yes” - and no one else has noticed yet - you might just have found your next alpha.