An Empirical Analysis of Returns on Invested Capital  149
In several industries, there was a clear downward trend in returns. These 
included trucking, health care facilities, and automobiles. Competition in 
trucking, advertising, and automobiles has increased substantially over the 
past five decades. Health-care facilities have had their prices squeezed by the 
government, insurers, and competition with nonprofits.
Industries where returns on invested capital clearly are trending up are 
rare. Examples are health-care equipment, airlines, and aerospace and defense. 
Innovation in health-care equipment has enabled the industry to produce 
higher-value-added, differentiated products such as artificial joints, as well as 
more commoditized products, including syringes and forceps. As mentioned 
earlier, the U.S. airlines industry benefited from consolidation, and companies 
in aerospace and defense reduced their capital intensity as governments pro-
vided up-front funding for many more contracts.
There is similar evidence of sustained rates of return at the company level. 
We measured the sustainability of company ROIC in our database of nonfi-
nancial corporations by ranking companies based on their ROIC in each year 
and dividing the group into quintiles. We treated each quintile as a portfolio 
and tracked the median ROIC for the portfolio over the following 15 years, 
as shown in Exhibit 8.10. The results indicate some mean reversion: compa-
nies earning high returns tended to see their ROIC fall gradually over the 
succeeding 15 years, and companies earning low returns tended to see them 
rise over time. Only in the portfolio containing companies generating returns 
between 5 and 10 percent (mostly regulated companies) do rates of return 
EXHIBIT 8.10  ROIC Decay Analysis
Median ROIC of portfolios (without goodwill), by quintile,1 %
0
5
10
15
20
25
30
35
0
1
3
5
7
9
2
4
6
8
10
11
12
13
14
15
Number of years following portfolio formation
1 At year 0, companies are grouped into one of five portfolios, based on ROIC.
Source: Corporate Performance Analytics by McKinsey.

150 RetuRn on Invested CapItal
 EXHIBIT  8.11 ROIC Decay through Economic Crisis and Recovery
Median ROIC of portfolios (excluding goodwill), by 2003 quartile,1 %
0
5
10
15
20
30
40
50
45
35
25
2005
2010
2015
1 As of 2003, companies are grouped into quartiles, based on ROIC.
 Source: Corporate Performance Analytics by McKinsey. 
remain constant. However, an important phenomenon is the persistence of 
superior performance beyond ten years. The returns of the best-performing 
companies do not decline all the way to the aggregate median over 15 years. 
High-performing companies are in general remarkably capable of sustaining a 
competitive advantage in their businesses and/or fi nding new business where 
they continue or rebuild such advantages. The pattern is stable over time—
even over the most recent 15 years, which included the 2008 credit crisis (see 
Exhibit 8.11 ). 
 Since a company’s continuing value is highly dependent on long-run fore-
casts of ROIC and growth, this result has important implications for corporate 
valuation. Basing a continuing value on the economic concept that ROIC will 
approach the weighted average cost of capital (WACC) is overly conservative 
for the typical company generating high ROIC. (Continuing value is the focus 
of Chapter 14.) 
 Keeping this range of performance in mind, it is important when bench-
marking the historical decay of company ROIC to segment results by industry, 
especially if industry is a proxy for sustainability of competitive advantage. 
As an example, Exhibit 8.12 plots the ROIC decay rates for branded consumer 
goods, again sorting the companies into fi ve portfolios based on their starting 
ROICs. Here, the top-performing companies don’t show much reversion to 
the mean. Even after 15 years, the original class of best performers still outper-
forms the bottom quintile by more than 13 percentage points. 

an empIRICal analysIs of RetuRns on Invested CapItal 151
 Although decay rates examine the rate of regression toward the mean, they 
present only aggregate results and tell us nothing about the spread of poten-
tial future performance. Does every company generating returns greater than 
20 percent eventually migrate to 15 percent, or do some companies actually 
go on to generate higher returns? Conversely, do some top performers become 
poor performers? To address this question, we measured the probability that 
a company will migrate from one ROIC grouping to another in ten years. The 
results are presented in Exhibit 8.13 . Read each row from left to right. 
 EXHIBIT  8.12 ROIC Decay for Branded Consumer Goods
Median ROIC of portfolios (without goodwill), by quintile,1 %
0
5
10
15
20
25
30
35
0
1
3
5
7
9
2
4
6
8
10
11
12
13
14
15
Number of years following portfolio formation
1 At year 0, companies are grouped into one of five portfolios, based on ROIC.
Source: Corporate Performance Analytics by McKinsey. 
 EXHIBIT  8.13 ROIC Transition Probability
Probability of achieving ROIC in 2017, %
ROIC in 2017, %1
ROIC in 2007 , %1
74
40
15
<15
>25
15–25
<15
17
32
14
70
15–20
9
28
>25
1 ROIC excluding goodwill.
 Source: Corporate Performance Analytics by McKinsey.