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.