Granted I only looked at asset for PE sponsors (so no public market stuff). I get it I get it, you can say the LBO is king and in the end the IRR comes out from the LBO independent from the ROI anyway.
Nonetheless, I still don't get why ROIC is not even a discussion point. The talk is always about EBITDA Margins and revenue growth / market share. Even when I look at business with different BUs, different margin structure, etc. ROIC is never a issue.
Wouldn't it be interesting to find out that the low margin BU actually is the much more attractive business then the high margin BU (i.e., due to much higher capital turnover). I mean I get it, senior dealmakers will have figured out way before me, but still. I don't get why even in discussions this never comes up. Always margins margins margins.
Just pulling stuff out my ass here so don't listen to me as an incoming IB analyst lol.
But my instinct is that a lot of ROIC thinking is already embedded in the things sponsors look at, just under different names. ROIC = NOPAT / Invested Capital.
NOPAT is driven by revenue and margins, so naturally people spend time understanding revenue quality (volume vs price vs mix, market growth, share gains) and margin structure (fixed vs variable costs, operating leverage, etc).
The invested capital side also shows up indirectly when people talk about capex intensity, working capital requirements, cash conversion, asset-light vs asset-heavy models, etc.
Also standalone ROIC is only part of the picture. For value creation the more interesting question is incremental ROIC: if the company reinvests another $1, what return can it generate? A business with mediocre historical ROIC but improving reinvestment opportunities can be more interesting than one with high ROIC and nowhere to deploy capital.
So I think it's less that ROIC is ignored and more that people break it into the underlying drivers rather than discuss the headline metric.
Incoming IB analyst thinking analytically far beyond your years! Good for you!
Jesus. I had a conversation with a CEO a couple months ago and he said literally exactly what you said about incremental ROIC.
Somebody's read Mauboussin!
Because people are lazy, and if everyone is lazy the same, companies don't trade based on the thing that people are too lazy to do
We look at ROIC all the time not sure what you’re talking about especially in industries with any sort of asset intensity…
Well you must not be lazy, which is good!
ROIC is difficult to measure for asset-light businesses and even harder to forecast. You see alternative metrics in some verticals like software which obsess over things like ‘salesforce efficiency’. But in general it’s just much easier to collect observations about organic growth, customer churn, recurring revenue, margins, cash conversion, etc.
A prime example of overcomplication and mental masturbation, folks.
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