Value Investing

[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)

ROIC valuation

See the full PDF below.

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