7 Aug 2020

  • It’s not enough to just have great returns – top-line growth is just as critical.
  • In fact, S&P 500 investors rewarded high-growth companies more than high-ROIC companies over the past decade.
  • While the distinction was less clear on the JSE, what is clear is that getting a balance of growth and returns is critical
  • Strong and consistent ROIC or RONA performers provide investors with a steady flow of discounted cash flows – without growth effectively a fixed-income instrument
  • Improvements in ROIC through margin improvements, efficiencies and working-capital optimisation provide point-in-time uplifts to share price.
  • Top-line growth presents a compounding mechanism – ROIC (and improvements) are compounded each year leading to on-going increases in share price.
  • However, without acceptable levels of ROIC, the benefits of compounding will be subdued and share price appreciation will be depressed – and when ROIC is below WACC value will be destroyed.
  • Maintaining high levels of growth is not as sustainable as maintaining high levels of ROIC – while both typically decline as industries mature, growth is usually more affected.
  • Getting the right balance between ROIC and growth is critical to optimising shareholder value.

Covid-19 – Johns Hopkins University

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