5.Annual value creation can be measured by the firm’s economic profits3
ii.Growth alone does not create value. To create value, ROIC must exceed WACC. When ROIC exceeds WACC, and the growth rate in invested capital is increased, the value creation is magnified. Conversely, if ROIC is below WACC, and the growth rateis increased, value creation is negative and value destruction is magnified.c.The following examples demonstrate how ROIC, growth and WACC are linked to value creation.Example 1 – Year 1Linking The Three Drivers Of Value (ROIC, Growth and WACC) to Value CreationCompany ACompany BCompany CROIC12%8%4%WACC8%8%8%ROIC – WACC 4%0%-4%x IC (beg. yr.)$100$100$100Economic Profits$ 4$0 $ -44
capital and growing will have a negative FCF if its investment back into the business exceeds NOPAT. As long as capital expenditures are for projects that generate returns above cost of capital, a negative FCF is good. A positive FCF canresult from cutting back on a profitable marketing program. In this case, the positive FCF is at the expense of a lower firm value.