Margin vs Capital-productivity

ROIC can be improved in two ways: by increasing operational efficiency or reducing the amount of capital needed for operations – for example, by optimizing inventory.

As shown in the table below, statistically, a one percentage point increase in ROIC boosts a company’s value more when accompanied by an increase in operational efficiency compared to the effect of reducing capital…

This interpretation is straightforward in the context of financial statements when considering a growing company. In such cases, as efficiency increases, additional financial gains are prolonged over time, while the impact of capital reduction occurs once…

The table shows that the higher the ROIC, the more difficult it is to increase value through capital efficiency, and the higher the ratio between the results achieved by improving ‘margin’ and ‘capital efficiency

source:

#VALUATION – Measuring and Managing the Value of Companies, 7th Edition.
McKinsey & Company, Tim Koller, Marc Goedhart, David Wessels

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