Key Value Driver Formula
Koller, Goedhart and Wessels reformulate Gordon Growth so that growth, return on invested capital (ROIC) and reinvestment are visible inputs. The result is the same value as Gordon Growth, but the analyst cannot hide an indefensible assumption about growth funded by zero reinvestment.
The key value driver equation
Where NOPAT is net operating profit after tax, g is the perpetuity growth rate, ROIC is the long-run return on invested capital, and WACC is the weighted average cost of capital. When g divided by ROIC equals the reinvestment rate, this collapses algebraically to the classic Gordon Growth formula with free cash flow as the numerator.
The two disciplines this formula enforces
Higher perpetuity growth requires higher reinvestment (capex plus working capital). The key driver formula forces that reinvestment to net against NOPAT in the numerator. If ROIC equals WACC, growth adds zero value.
Above-WACC ROIC is a competitive-advantage claim. In perpetuity, that claim is heroic for most industries. Forcing ROIC into the formula puts the analyst on the record about how long the moat lasts.
Where this fits in the method family
- Gordon Growth Method algebraic identity when reinvestment = g / ROIC.
- Exit Multiple Method an alternative anchor that does not require ROIC.
- WACC and Terminal Value the discount rate input shared across all variants.