Hegel was right when he said that we learn from history that man can never learn anything from history. "Some companies do post persistently high or low returns beyond what chance dictates. But the ROIC data incorporate much more randomness than most analysts realize."
Analysts modeling future corporate financial performance should use past return on invested capital (ROIC) patterns, including a strong tendency toward mean reversion, as an appropriate reference class but rarely do. Full consideration of the difficulty in sustaining high returns should temper the optimism inherent in many models.
• Some companies do post persistently high or low returns beyond what chance dictates. But the ROIC data incorporate much more randomness than most analysts realize.
• We had little luck in identifying the factors behind sustainably high returns.
• This analysis has concrete implications for modeling. We unveil some of the common errors in discounted cash flow models and offer some thoughts on how to improve them.
Read the complete study
Analysts modeling future corporate financial performance should use past return on invested capital (ROIC) patterns, including a strong tendency toward mean reversion, as an appropriate reference class but rarely do. Full consideration of the difficulty in sustaining high returns should temper the optimism inherent in many models.
• Some companies do post persistently high or low returns beyond what chance dictates. But the ROIC data incorporate much more randomness than most analysts realize.
• We had little luck in identifying the factors behind sustainably high returns.
• This analysis has concrete implications for modeling. We unveil some of the common errors in discounted cash flow models and offer some thoughts on how to improve them.
Read the complete study
