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1. How does return on invested capital (ROIC) affect a company's cash flow? Explain the relationship...

1. How does return on invested capital (ROIC) affect a company's cash flow?
Explain the relationship between ROIC, growth, and cash flow.

2. If value is based on discounted cash flows, why should a company or
investor analyze growth and ROIC?

3. Under what circumstances does growth destroy value?

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Answer #1

Answer 1.

ROIC affect companies flow

According to the mathematical decomposition provided above we can state thatincrease in ROIC results in higher cash flow by keeping all other factors constant.Secondly, when the ROIC is less than cost of capital, an increase in the growth rate leadsto the decrease in the company’s value.Ideally, increase in both ROIC and growth rate drives the company’s value the most..

Answer 2

The first reason is in the formula provided above, growth and ROIC are constituents ofthe cash flows to be discounted. In other words, growth and ROIC are genuine indicatorsof company’s potential to generate wealth for its shareholders, not the earnings,accounting policies and other “cosmetics” to look

Answer 3

Growth destroy value, when ROIC is smaller than the cost of capital.

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