[Archives] Primer On The ROIC Valuation Framework

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[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

The Role Of Knowledge In Asset Management

Active Management FundsIs there a link between intelligence, knowledge and successful investing? At first glance, it might appear as if there is. Wall Street is known for only hiring the best and brightest. However, some of the world’s most successful investors didn’t attend the world’s best universities and don’t claim to have a higher than average I.Q. Read More

  • 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.

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