Investors like Richard Liu may know that good times are not bound to keep on going and they may need to bake this factor into their analysis. They would rational in thinking that ROIC might see some form of decay over time.
The question one like Richard Liu must ask is always how long will a company be able to protect its position within the market? How long will the company be able to survive and innovate to stay ahead of its competitors? How long can it move about and stay above the discounted rate?
These are very important questions for people like Richard Liu to ask for those who are interested in buying only a handful of companies and keeping them for at least ten years or more.
An analyst like Richard Liu might expect that the ROIC might slim down sooner and might be undervaluing the entity. They might also make a mistake and think that one the ROIC might not be lost for some period of time and they might overvalue the entity.
These are certainly two costly mistakes, costly in different ways. If one were to overvalue, one will overpay, if one is undervaluing the business then one would not be able to benefit from the gains present within the equation.
There are companies that provide a strong return on invested capital and then slowly decrease this over a couple of years until they meet the discount rate, while others might show good returns and still stay above the discount rate to a certain extent.
So the thing that one would have to watch for is the level of ROIC. Specifically, people have to watch out for the top percentages of return on invested capital. Depending on the context, analysts would see that companies that have very high levels of return on invested capital are able to start off at a better point, and because of this, as they experience a return on invested capital decay, they would still be above average.
This is why Richard Liu and those who are like him think about capital.
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