In This Article
- Exhibit 1: For companies that already have high returns on invested capital (ROIC), growth generates higher returns to shareholders (TRS) than further improvements to ROIC.
- Exhibit 2: Companies with medium ROIC must maintain their growth and improve their ROIC.
- Exhibit 3: For companies with low ROIC, improvement in it is clearly more important than growth.
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Value-minded executives know that although growth is good, returns on invested capital (ROIC) can be an equally—or still more—important indicator of value creation.1 Yet even executives at the best companies often wrestle with strategic decisions in order to reach the right balance between growth and returns. We repeatedly come across executives whose companies earn high returns on capital but who are unwilling to let those returns decline to encourage faster growth. Conversely, we see executives at companies with low returns working to promote growth instead of improving their ROIC.
Large companies in particular can find it difficult to grow without giving up some of their existing returns.2 What’s more, many executives are accustomed to seeing growth and returns improve (or decline) hand in hand as market conditions change. As a result, decision makers may hesitate to alter strategic directions, fearing a lag in market acceptance.
To understand better how value is created over time, we identified all nonfinancial US companies that had a market cap of more than $2 billion3 in 1995 and had been listed for at least a decade as of that year. When we examined their growth and ROIC performance over the subsequent decade,...