Finance theory isn’t enough when companies set their expectations for reasonable returns on invested capital. A long-term analysis of market and industry trends can help.
savvy executives know that the decision to invest in a project often hangs on reasonable expectations of its return on invested capital. But what constitutes “reasonable”? Companies that rely on the wrong benchmark can overlook good investments or pursue bad ones. We find that empirical analyses of ROICs—particularly those illustrating industry-specific patterns over time—can help executives ground their expectations in the collective long-term experience of other companies.
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