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Saturday, May 19, 2018
Roic as core value
ROIC is a pillar of the core value of cash flow generation. A firm's ability to improve its ROIC depends on its competitive position within its industry. A combination of strategy, industry characteristics and rivals' practices produces a corporation's competitive advantage.
"Companies will go to great lengths to achieve a certain earnings per share number…but this is mostly wasted energy."
Companies may be first movers in their sectors, and scale and scope both can provide an edge. Product and service might differentiate a business as well. High-ROIC industries tend to offer uniquely specialized brand products, like cosmetics, and industries with low ROICs generally market generic items, like paper. Their efficient use of capital is critical. Price premium and capital cost efficiency dictate ROIC.
Growth is the other mainstay of core value, but not all growth is equal. Successful product introductions into new markets can add revenue streams, which turn into new earnings and cash flows. Such market expansion tends to contribute the most value to a firm. Slashing prices to increase product share in a market helps very little, because competitors can readily cut their prices, too, thereby undermining any gains in value.