What should an investor consider when deciding between a company with 30% growth and 5% ROIC versus one with 10% growth and 15% ROIC?

When deciding between two companies with different growth rates and ROIC (Return on Invested Capital), an investor should focus on the companies' WACC (Weighted Average Cost of Capital). WACC is critical because it represents the average rate that a company is expected to pay to finance its assets, reflecting the risk associated with its capital structure.

In this scenario, considering the company's WACC helps an investor understand how much return is needed to satisfy investors and lenders. A company with 30% growth but a low ROIC of 5% could be generating high revenues but is less effective at generating returns on its investment, which may not justify the high growth rate. On the other hand, a company with a 10% growth rate and a 15% ROIC is demonstrating efficiency in converting its investments into meaningful returns, exceeding its cost of capital.

This comparative analysis on how the growth rates and ROIC relate to WACC assists the investor in identifying which company has better potential for sustained value creation. By aligning growth with efficient capital utilization, an investor can make more informed decisions on long-term viability and profitability.