It is essential to accurately forecast the new and stable ROIC, or RONIC, for future horizon predictions. Theoretically, if competition increases alongside organizational capabilities, the margin of error for every new investment decreases. As time passes, finding positive NPV projects becomes more challenging, and the size of this margin decreases naturally.
In reality, competitive advantage operates precisely here, as the higher the ROIC compared to the WACC, the more sustainable the advantage, despite competitors pushing it towards the WACC due to their competitive forces.
In short, forecasting RONIC for the horizon will likely yield a lower figure, and this must be considered. However, it’s not necessary to assume the WACC will decline. Sometimes, dominant companies in an industry take over and correct to their average. However, strategic considerations are more…
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#VALUATION – Measuring and Managing the Value of Companies
7th Edition
McKinsey & Company
Tim Koller, Marc Goedhart, David Wessels