152  Return on Invested Capital
Both high and low performers demonstrate significant stability in their 
performance. Companies with high or low ROIC are most likely to stay in the 
same grouping. A company whose ROIC was below 15 percent in 2007 had 
a 74 percent chance of earning less than 15 percent in 2017. For companies 
with a ROIC above 25 percent, the probability of maintaining that high perfor-
mance was 70 percent. Among companies whose ROIC was between 15 and 
25 percent in 2007, there was no clear tendency for companies to increase or 
decrease their ROIC ten years later.
Effect of Acquisitions on ROIC
While returns on invested capital without goodwill have been increas-
ing, returns on invested capital with goodwill have been flat, as shown in 
Exhibit 8.14. Companies paid high prices for their acquisitions, so much of the 
value the deals created was transferred to the shareholders of the target com-
pany. (Acquisitions and value creation are discussed in Chapter 31.) It does 
not mean that companies have failed to create value from acquisitions: returns 
on capital including goodwill above the cost of capital, combined with ongo-
ing growth, indicate that they have created value above and beyond the price 
paid for these acquisitions. Increasing returns without goodwill indicates that 
companies have captured significant synergies to improve the performance of 
the acquired businesses.
For some industries, the differences in return with and without goodwill 
are even bigger than shown here. For the life science and technology sectors, 
for example, returns on capital including goodwill were around 25 percent, 
versus 65 percent without goodwill. Companies in this sector have created 
more value than any other sector, but shareholders of acquired companies 
captured much of it.
EXHIBIT 8.14  ROIC Including and Excluding Goodwill, 1995–2017
Median ROIC, %
0
5
10
15
20
25
Including goodwill
Excluding goodwill
2000
2005
2010
2015
1995
1990
1985
1980
1975
1970
1965
Source: Corporate Performance Analytics by McKinsey.

Summary  153
Summary
There is much to learn about returns on invested capital. First, these returns 
are driven by competitive advantages that enable companies to realize price 
premiums, cost and capital efficiencies, or some combination of these. Sec-
ond, industry structure is an important—but not an exclusive—determinant 
of ROIC. Certain industries are more likely to earn either high, medium, or 
low returns, but there is still significant variation in the rates of return for 
individual companies within each industry. Third, and most important, if a 
company finds a formula or strategy that earns an attractive ROIC, there is a 
good chance it can sustain that attractive return over time and through chang-
ing economic, industry, and company conditions, especially in the case of in-
dustries that enjoy relatively long product life cycles. Of course, the converse 
also is true: if a company earns a low ROIC, that is likely to persist as well.

155
9
Growth
Growth and its pursuit grip the business world. The popular view is that a 
company must grow to survive and prosper. There is certainly some truth 
to this. Slow-growing companies present fewer interesting opportunities for 
managers and so may have difficulty attracting and retaining talent. They 
are also much more likely to be acquired than faster-growing firms. Over the 
past 25 years, most of the companies that have disappeared from the S&P 500 
index were acquired by larger companies or went private.
However, as discussed in Chapters 2 and 3, growth creates value only 
when a company’s new customers, projects, or acquisitions generate returns 
on invested capital (ROIC) greater than its cost of capital. And as companies 
grow larger and their industries become ever more competitive, finding good, 
high-value-creating projects becomes increasingly difficult. Striking the right 
balance between growth and return on invested capital is critically impor-
tant to value creation. Our research shows that for companies with a high 
ROIC, shareholder returns are affected more by an increase in revenues than 
an increase in ROIC.1 Indeed, we have found that if such companies let their 
ROIC drop a bit (though not too much) to achieve higher growth, their re-
turns to shareholders are higher than for companies that maintain or improve 
their high ROIC but grow more slowly. Conversely, for companies with a low 
ROIC, increasing it will create more value than growing the company will.
The previous chapter explored why executives need to understand whether 
their strategies will lead to high returns on invested capital. Similarly, they 
also need to know which growth opportunities will create the most value. 
This chapter discusses the principal strategies for driving revenue growth, the 
ways in which growth creates value, and the challenges of sustaining growth. 
It ends by analyzing the data on corporate growth patterns over the past 
55 years.
1 See T. Koller and B. Jiang, “How to Choose between Growth and ROIC,” McKinsey on Finance, 
no. 25 (Autumn 2007): 19–22.