34  Fundamental Principles of Value Creation
Balancing ROIC and Growth to Create Value
It is possible to create a matrix that shows how different combinations of 
growth and ROIC translate into value (Exhibit 3.6). Each cell in the matrix 
represents the present value of future cash flows under each of the assump-
tions of growth and ROIC, discounted at the company’s cost of capital. This 
case assumes a 9 percent cost of capital and a company that earns $100 in the 
first year.4
Observe that for any level of growth, value increases with improvements 
in ROIC. In other words, when all else is equal, a higher ROIC is always good, 
because it means that the company doesn’t have to invest as much to achieve 
a given level of growth. The same can’t be said of growth. When ROIC is 
high, faster growth increases value. But when ROIC is lower than the com-
pany’s cost of capital, faster growth destroys value. When return on capital 
is lower than the cost of capital, growing faster means investing more at a 
value-destroying return. Where ROIC equals the cost of capital, we can draw 
the dividing line between creating and destroying value through growth. On 
that line, value is neither created nor destroyed, regardless of how fast the 
company grows. It’s as if management were on a treadmill. They’re working 
hard, but after their workout, they are right where they started.
From the exhibit, you can also see that a company with high ROIC and low 
growth may have a similar or higher valuation multiple than a company with 
EXHIBIT 3.6  Translating Growth and ROIC into Value
Value,1 $
7%
9%
13%
ROIC
3%
6%
9%
Growth
25%
400
1,100
1,900
600
1,100
1,600
800
1,100
1,400
2,700
2,100
1,600
1 Present value of future cash flows, assuming year 1 earnings of $100 and a 9% cost of capital. After 15 years, all scenarios grow at 4.5%.
4 We made explicit cash flow forecasts for the first 15 years and assumed that growth after that point 
converges on 4.5 percent in all scenarios. If a company grew faster than the economy forever, it would 
eventually overtake the entire world economy.

Some Examples  35
higher growth but low ROIC. For example, at the end of 2017, Brown-Forman 
and Costco were both valued with a ratio of enterprise value to pretax oper-
ating profits in the range of 19 to 20 times. Yet Costco had been growing at 
7 percent per year over the prior three years, while Brown-Forman had grown 
at less than 2 percent per year. Again, Brown-Forman made up for its lower 
growth with a higher ROIC of 30 percent in 2017, versus 15 percent for Costco 
(which is good for a capital-intensive, low-margin retailer).
We sometimes hear the argument that even low-ROIC companies should 
strive for growth. The logic is that if a company grows, its ROIC will naturally 
increase. However, we find this is true only for young, start-up businesses. 
Most often in mature companies, a low ROIC indicates a flawed business 
model or unattractive industry structure. Don’t fall for the trap that growth 
will lead to scale economies that automatically increase a company’s return on 
capital. It almost never happens for mature businesses.
Some Examples
The logic laid out in this section reflects the way companies perform in the 
stock market. Recall the earlier explanation of why shareholder returns for 
Costco and Brown-Forman were the same even though earnings for Costco 
grew much faster. Another example of the relative impact of growth and ROIC 
on value is Rockwell Automation, which provides integrated systems to mon-
itor and control automation in factories. Rockwell’s total shareholder returns 
(TSR) from 1995 to 2018 were 19 percent per year, placing it in the top quar-
tile of industrial companies. During this period, Rockwell’s revenues actually 
shrank from $13 billion in 1995 to $7 billion in 2018 as it divested its aviation 
and power systems divisions. The major factor behind its high TSR was its 
success in increasing ROIC, from about 12 percent in the mid-1990s to about 
35 percent in 2018 (including goodwill). After spinning off its aviation busi-
ness (now known as Rockwell Collins) in 2001, Rockwell focused on its core 
industrial-automation business and improved ROIC significantly. While this 
was partially accomplished by divesting lower-margin ancillary businesses, 
the majority of the improvement came from operational improvement in in-
dustrial automation. The company publicly reiterated its focus on cost and 
capital productivity many times during the period.
Clearly, the core valuation principle applies at the company level. We have 
found that it applies at the sector level, too. Consider companies as a whole in 
the consumer packaged-goods sector. Even though well-known names in the 
sector such as Procter & Gamble and Colgate-Palmolive aren’t high-growth 
companies, the market values them at average or higher earnings multiples 
because of their high returns on invested capital.
The typical large packaged-goods company increased its revenues 1.2 per-
cent a year from 2014 to 2019, slower than the median of about 4.5 percent for