ROIC Persistence
ROIC Persistence
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A study by Michael Mauboussin* (2007) on ROIC persistence found that 41% of the companies with the highest ROIC in 1997 were still among the companies with the highest ROIC nine years later.
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Similarly, 39% of the companies in the lowest ROIC quintile were still in the lowest quintile nine years later.
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If there were no persistence in ROIC, we would expect 20% of companies to be in each quintile in 2006, with an even distribution between quintiles.
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This implies that some quality companies perform well over time and that the reversal of the mean takes more than 9 years to catch up.
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This study shows that companies are unlikely to rise from the worst quintile to the best quintile; in the study only 15% of companies have done so.
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Weak companies tend to remain weak.
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The companies that make the leap from weak to strong are the best performing stocks, but it is difficult to find these companies and they are much riskier than the companies that are already great companies.
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The key takeaway for us is that we should try to find companies that have the right ingredients in place to sustain high ROIC.
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We prefer to look for the companies that are in the top quintile and that we believe will stay there because we believe our chances of finding them are greater and will give us a better risk-adjusted return over the long run.
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If you find a company that continues to deliver a top quartile ROIC you are likely to get good returns over the long term.
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Source :
https://req.no/wp-content/uploads/2023/03/REQ-ROIC-persistence.pdf
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Reference :
https://hurricanecapital.wordpress.com/wp-content/uploads/2015/02/deathtaxesandreversiontothemean.pdf