Here’s a recent interview with Phil Ruvinsky, head of Growth Investing at Blackrock, from a recent Columbia Business School podcast episode hosted by Michael Mouboussin. It touches on some of the topics covered in the last post on ROIC including:
- Per Moubaussin, ROIC measures the economic returns of a business, with two parts: operating margin (numerator) and capital velocity (denominator).
- The durability of high (incremental) ROIC is perhaps just as important as high ROIC in the first place, and since this involves predicting the future, it’s a valuable skill
- Some businesses have low margins (low ROIC numerator), but are very capital efficient/employ limited amounts of capital or turn capital quickly. So they are desirable high ROIC businesses that generate economic profits, despite the low margins
- Amazon in the early 2000’s (pre-AWS) was an example of the dynamic mentioned above, and AWS is an example of the opposite: it’s high margin (ROIC numerator), but high capital investment (ROIC denominator)
- Less directly related to a company’s ROIC: the current debate about generative AI. Prominent tech platforms are investing gigantic amounts of money in AI, but the stakes are high because the ROI on that capital investment is still unclear. During the late 1990’s tech bubble, for example, a cable company had a good idea of what it could make by investing in laying cable because it knew how many homes were being passed. Successful AI investment promises much more exponential returns than cable infrastructure, but it’s also far less certain to bear fruit.
This podcast has some exceptional guests so it’s worth checking out other episodes.
