[Archives] Primer On The ROIC Valuation Framework

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.