Primer On The ROIC Valuation Framework via CSInvesting
From August 2004
ROIC Valuation: Four Levers Drive Value
Excess Return
- Value is created by earning returns (ROIC) in excess of cost of capital (WACC).
Reinvestment Opportunities:
- Value creation depends upon driving operating profit and investing in NPV-positive opportunities; growth drives value only during periods of competitive advantage.
Duration of Competitive Advantage:
- Excess returns during periods of competitive advantage; without competitive advantage, returns tend to regress to the WACC.
Risk:
- Lower perceived business risk reduces required returns on capital, increasing excess return (all else equal)
See the full PDF below.
