This is something that bugged me for a long time. My college corp. finance / valuation class followed very in-line with the principles teached by Damodaran.
One of the core tenets in his valuation method is to estimate growth via ROIC*reinvestment-rate, thereby assuming that growth can only come from reinvesting into the existing assets.
What I don't get about this:
- say I'm looking at a tech-company which does incredibly well in low-cost marketing efforts and grows fast through that (i.e., goes viral, etc.). How is this growth captured in the formula above? It is neither related to CapEx investments nor to only existing assets
- same as a company that bets on a new (adjacent) market. Say it currently has an existing ROIC of 8% and reinvests 50% of its earnings according to the logic this would give me a growth estimate of 4%. I know, however, that they are about to crack a very interesting adjacent market with much higher growth rate. How is this captured by ROIC*reinvestment
I think you get what I am trying to point at. I get that the formula provides analytical starting point for estimating growth that is likely (for mature) companies more grounded in reality than just assuming growth rates. Yet it does not seem as universally applicable as I can think of so many instances that produce growth but are not tied to reinvestment or existing ROIC.
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