ROIC Growth Rate

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Definition

This is an academic method to calculate future growth rates. It assumes that a company can reinvest earnings (which are calculated as ROIC * Book Value of Invested Capital = Earnings) that it does not pay out as dividends. In other words, each year the company each year reinvests:

Earnings * Plowback Ratio = (Earnings- Dividends Paid)/Earnings

Which in-turn increases the company's invested capital by that amount. Then, next year's Earnings will then grow because invested capital grows and ROIC is assumed to be constant. By iterating this process, the resulting growth rate is defined as in the formula below.

Unfortunately, this method of calculating growth rates did not stand up to our empirical tests. Hence, we have not included it in any of our Pro Valuations.

Formula

ROIC Growth Rate = ROIC x (Plowback Ratio)

Same as:

ROIC Growth Rate = ROIC x (1 - Dividend Payout Ratio)

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