To get back to the other main question, can companies with lower ROIC not create better Value. Yes they can, if we go back to the Economic Profit definition
Economic Profit = Invested Capital x (ROIC - WACC)
If returns on capital are too low, high Invested Capital (high growth)could destroy value. Conversely, earning a high ROIC on a low capital base may mean missed opportunities.
This clearly shows us that size of** Invested Capital also matters.Consider two companies starting at the same time with identical expected return on capital over their cost of capital. However one company plans/can invest twice as much as the other. As a result, the company withhigher investment**(and thereforefaster growth)should have ahigher value, despite identical returns on capital. It becomes clear that both_growthandreturn on invested capital_drive “Value”.
So a better perspective to look at asset-heavy companies like Astral or BKT (creating value over medium to long term) would be look at the Economic Profit generated by them, which takes into consideration the size of Invested Capital that makes for higher growth too.
The difficulty I run into there is that EP is not a ratio. So the current scale of one business versus another ends up confusing me.
Any ideas on how to use the Economic Profit measure across companies??
-Donald