Why High ROIC Isn’t Always Defensive: When Moats Disappear in a Storm
How Return on Invested Capital Can Lure Investors Into False Security
The phrase “high ROIC” has become a mantra for quality-focused investors. On paper, it’s the Holy Grail: companies generating outsized returns from every dollar of invested capital, signaling efficient management, robust margins, and—supposedly—an unassailable moat. But what if that fortress isn’t as sturdy as it seems? What if, in certain sectors, high ROIC is less a castle and more a sandcastle waiting for the tide?
The Siren Song of High ROIC
Return on Invested Capital (ROIC) is a seductive number. It promises durability. It whispers, “This business can out-earn its cost of capital, year after year.” Asset-light tech companies, dominant consumer franchises, specialty healthcare: all parade their double-digit ROICs as badges of invincibility.
But ask yourself: Is a high ROIC always a shield against trouble? Or can it sometimes be a mirage—particularly when sectoral dynamics are shifting beneath our feet?
Capital Floods: When High ROIC Invites Competition
In industrials, semiconductors, or even software, a high ROIC can be a flare in the night for capital allocators. Private equity, new entrants, and even sleepy incumbents awaken at the scent of supernormal returns. The capital cycle begins: new money chases the high ROIC, capacity expands, pricing erodes, and—like a tide retreating—ROIC normalizes, or worse, collapses.
| Sector | Typical ROIC | Threats to Defensiveness | Capital Cycle Risk |
|---|---|---|---|
| Software | High | Low switching costs, tech disruption | Moderate |
| Consumer Staples | Moderate–High | Brand erosion, retailer power | Low–Moderate |
| Semiconductors | High (cyclical) | Overcapacity, rapid tech shifts | High |
| Utilities | Low–Moderate | Regulation, capital intensity | Low |
| Healthcare (Devices) | High | Patent cliffs, reimbursement risk | Moderate |
Moats: Not All Are Dug in Stone
In consumer brands, high ROICs often reflect decades of trust and distribution muscle. But even these moats are under siege: private labels, e-commerce platforms, and shifting consumer preferences can erode returns. In software, today’s SaaS darling with 40% ROIC may become tomorrow’s commodity as barriers to entry fall and customer stickiness wanes.
The subtlety: High ROIC is evidence of past success, not always a guarantee of future resilience. In sectors where the moat is technology or regulation, a single shift—be it a new protocol, an adverse legal ruling, or a disruptive entrant—can turn quality to quicksand.
Defensive or Just Expensive?
There’s another twist: the “defensive” label is often a function of price. High ROIC stocks tend to attract premium multiples, especially in uncertain markets. But this safety can become a trap. When narratives break, the “bond proxies” of the equity world—like consumer staples or stable software—can see their multiples compress violently, even if their underlying business remains intact.
Ask yourself: is the high ROIC company truly insulated, or is it simply beloved by investors—until it isn’t?
Context, Not Just Quality
The lesson for capital allocators and analysts: Sector context matters. High ROIC in regulated utilities means something very different than in cyclical semiconductors. Sustainable returns are forged not just in clever management, but in understanding industry structure, capital cycles, and the ever-moving target of competitive advantage.
Because sometimes, the best-looking moat is just a puddle in a drought.