Why very few companies are capable of sustaining a high return on capital？

Long_Equity
03-25

Three reasons why very few companies are capable of sustaining a high return on capital over a long period of time:

1. Economic downturns - few companies are resilient to these due to exposure to commodities and interest rates (eg banks and energy companies).

2. Reinvestment opportunities - companies lacking reinvestment oppportunities typically pay out a large chunk of their earnings as a dividend, rather than reinvest (eg consumer staples).

3. Pricing power - few companies are capable of raising prices without losing sales to their competition.

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Valuation reflects both future growth and current multiple. I personally focus on future growth. I see a lot of value currently in $Applied Materials(AMAT)$ and $Fortinet(FTNT)$ .

By definition, there has to be something to invest in to generate a return on investment. But I agree, consumer staples have low growth rates and high ROC.

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