RONIC

One crucial question that arises during organizational valuation is how to forecast ROIC in the stable growth phase? For example, if we assume zero real growth in the horizon, as it is logical in many scenarios, wouldn’t it be incorrect to assume ROIC=WACC?

In practice, this isn’t the case for two main reasons:

1. The nominal and cumulative ROIC diverge from each other when the nominal investment exceeds WACC. This can happen when cumulative returns are still high even after several years.
2. The budgetary ROIC differs from the economic one, especially when there is “non-traditional” depreciation schedules or changes in asset fair values.

How should the problem be approached?

A good news is that academics confirm a low (P<5%) correlation between budgetary and economic ROIC.

Additionally, Monte Carlo simulation methods can be utilized. We know that during the stable growth period, ROIC[H] will fluctuate somewhere between current WACC and ROIC… = randbetween(wacc,roic)

If a more precise figure is required, it’s advisable to seek comparable organizations within the same industry and analyze…