main problem of roic for me is that some expenses too are also actually investments (r&d, s&m). not too much for established businesses maybe but i believe you can not really analyze a company that is in the fast growing phase with roic
main problem of roic for me is that some expenses too are also actually investments (r&d, s&m). not too much for established businesses maybe but i believe you can not really analyze a company that is in the fast growing phase with roic
Like a lot in investing, I think there's the clean principle, which is very useful to understand, but then you have to be careful to apply it correctly to the very messy world of business.
So in the case of a business that is early in its growth phase, of course all the growth investments probably mask things, and you have to try to figure out unit economics and make some educated guesses about what a mature state may look like for the business, etc.
Definitely not easy, but closer to the target than those who'll just say "it loses money so it's a terrible business", right?
exactly. so with it we can also rule out the earnings multiples. I agree 100% that unit economics is much better than ROIC. But as you said, in a mature state, some companies might still need to do these s&m and r&d spendings just to keep up. So I can not really do dcf either. that's why most of the time I can not value businesses and just stick to index funds. I generally have a good understanding of unit economics but I just can't value the companies and always have this feeling that I'm paying too much.
I doubt anyone can value most companies (if it they think they can, they aren't really, they just have some simplistic heuristic without much understanding of the actual business). But you only need a few in a portfolio, so I don't mind too much that I can't value most things.
main problem of roic for me is that some expenses too are also actually investments (r&d, s&m). not too much for established businesses maybe but i believe you can not really analyze a company that is in the fast growing phase with roic
Like a lot in investing, I think there's the clean principle, which is very useful to understand, but then you have to be careful to apply it correctly to the very messy world of business.
So in the case of a business that is early in its growth phase, of course all the growth investments probably mask things, and you have to try to figure out unit economics and make some educated guesses about what a mature state may look like for the business, etc.
Definitely not easy, but closer to the target than those who'll just say "it loses money so it's a terrible business", right?
exactly. so with it we can also rule out the earnings multiples. I agree 100% that unit economics is much better than ROIC. But as you said, in a mature state, some companies might still need to do these s&m and r&d spendings just to keep up. So I can not really do dcf either. that's why most of the time I can not value businesses and just stick to index funds. I generally have a good understanding of unit economics but I just can't value the companies and always have this feeling that I'm paying too much.
I doubt anyone can value most companies (if it they think they can, they aren't really, they just have some simplistic heuristic without much understanding of the actual business). But you only need a few in a portfolio, so I don't mind too much that I can't value most things.