Value increases with increase in ROIC. The same cannot be said for growth. In
fact, for a low ROIC, growth decreases value. Low ROIC and high growth is only
true for young, start up businesses.
If ROIC = Cost of Capital, then growth rate doesnt make a difference.
For the most part, Asian companies historically have focused more on growth
than profitability or ROIC, which explains the large difference between their
average valuation and that of US companies.
Companies earning a high ROIC can generate more additional value by increasing
their rate of growth, rather than their ROIC, while low ROIC companies will
generate relatively more value by focusing on increasing their ROIC.
The previous discussion assumed that all growth earns the same ROIC and thus
generates the same value. This is unrealistic.
See pecking order of growth-related value creation that applies to its industry and
company type.
Some high value creators were those who grew fast at the expense of moderate
decline of ROIC. They were much higher value creator than those who increased
their ROIC but grew very slowly.
The cost of capital to a company equals the minimum return that investors expect
to earn from investing in the company. Thus, the expected return to investors and
cost of capital are essentially the same.
Shouldnt take risk on a project that has heavy spill over effect on the main
company.