| Question: When earning start showing up and reinvestment slow down, will it lower valuation? or it compensate the reinvestment with ROIC? |
Answer:
When earnings start rising and reinvestment slows down, valuation can go either up or down — it depends on ROIC vs WACC.
Let me break it down clearly.
FIRST: What happens when a company moves from “build mode” → “harvest mode”?
This transition includes:
- capex drops
- reinvestment rate drops
- free cash flow jumps
- earnings start accelerating
- ROIC bottom → then rises
- debt starts being repaid
This is normal and not a negative thing.
SCENARIO A — If ROIC stays ABOVE WACC → valuation EXPANDS or stays high
This is the company right now:
- ROIC = ~18%
- WACC = ~13.5%
- Spread = +4.5% (value creation)
If the company:
- lowers reinvestment rate
- but redeploys capital into high-ROIC operations
- and earnings grow due to new factory utilization
→ the market rewards it.
Why?
Because:
- free cash flow increases
- earnings become more predictable
- return on capital improves
- risk premium decreases
This is what happens to companies like:
- Unilever Indonesia
- Mayora
- ICBP
- Japanese beverage companies (Suntory, Asahi)
Once they hit “harvesting mode,” P/E multiples tend to increase or remain premium because the business becomes FCF-rich and low-risk.
SCENARIO B — If ROIC falls to WACC or BELOW → valuation CONTRACTS
This happens when:
- they build factories
- but demand doesn’t grow enough
- so those assets generate weak returns
If ROIC < WACC:
- every new rupiah invested destroys value
- FCF still rises (because capex dropped)
- BUT the market applies a lower multiple
→ higher cash flow, but lower valuation
→ stock may even fall despite earnings growth
This happened to:
- SMGR after overbuilding cement capacity
- MEDC during certain cycles
- Some palm oil companies after expansion waves
| Question: Once they hit “harvesting mode,” P/E multiples tend to increase or remain premium because the business becomes FCF-rich and low-risk. I always tought market prefers growth with high multiple, but mature too? |
Answer:
This is where most retail investors misunderstand how valuations actually behave.
You’re thinking:
“High P/E = high growth.”
“Low P/E = mature company.”
That is partially true, but incomplete.
The real driver of valuation isn’t growth alone — it’s the combination of ROIC + FCF + risk.
Let me explain clearly.
1. There are TWO types of companies that get premium P/E multiples
Type A — High-growth, high-ROIC companies (“Growth Compounding Mode”)
Examples:
- Tesla (2019–2021)
- Amazon (early years)
- Sea Group (early expansion)
High P/E because:
- Growth is explosive
- ROIC expectations are high
- Reinvestment rate is high
- FCF is negative or small
- Market prices in future earnings
This is the one people understand.
Type B — Mature, stable, high-ROIC, FCF-rich companies (“Harvest Mode”)
Examples:
- Coca-Cola
- Unilever
- Procter & Gamble
- Indofood CBP
- Japanese consumer giants (Asahi, Kirin, Kao)
These companies grow only 3–8% per year, yet trade at P/E 20–35× for DECADES.
Why?
Because:
- ROIC is very high
- Cash flow is extremely stable
- Risk is very low
- Reinvestment is low → massive free cash flow
- Earnings don’t surprise
- Downside is limited
- Durable competitive advantage
Market pays a premium for safety.
2. Why do mature companies with slow growth get PREMIUM valuations?
Because valuation =
“Discounted cash flow + risk premium + longevity of returns”
In harvesting mode:
- Free cash flow explodes
- Volatility drops
- Earnings become predictable
- Capex drops
- Balance sheet strengthens
- ROIC increases because assets finally generate returns
- Company becomes “boring but unstoppable”
Boring companies with steady cash and high ROIC = investor heaven.
Growth is nice.
But certainty + cash flow + ROIC is often MORE valuable.
⭐ 4. What the market actually loves
The market pays a premium for businesses that can compound capital with LOW risk.
Most high-growth companies carry:
- high uncertainty
- high reinvestment need
- low free cash flow
- high volatility
this company will soon have:
- positive free cash flow
- low capex needs
- fully ramped factories
- strong ROIC
- predictable demand
This profile often leads to stable or higher P/E, not lower.
| Question: If the company now traded at IRR 6.7%? What if we bought even bough at IRR 5.5%… |
Answer:
“The company now trades at IRR 6.7%. I even bought at IRR 5.5%…”
You’re talking about the implied long-term return baked into the current stock price.
And yes, those numbers are low.
But low IRR does not automatically mean the stock is bad — it means something different:
The market is pricing the company as a high-quality, low-risk, consumer-staple compounder,
not a high-return deep-value idea.
1. IRR of 5.5% – 7% is NORMAL for premium consumer staples
Look at global comps:
| Company | Typical IRR at fair price |
| Coca-Cola (KO) | 4%–7% |
| Pepsi | 5%–8% |
| Nestlé | 4%–6% |
| Unilever | 5%–7% |
| ICBP | 6%–9% |
| SIDO | 5%–8% |
Why?
Because these companies trade:
- at high multiples
- with consistent earnings
- with low risk
- with stable demand
- with predictable ROIC
Market accepts low forward returns for less uncertainty.
2. Your company IRR appears low because the company is entering “post-expansion mode”
When a company is:
- finishing capex
- stabilizing ROIC
- increasing FCF
- lowering debt
- lowering reinvestment
What happens?
IRR naturally compresses.
This is normal.
You are no longer buying “explosive growth company.”
You are buying “lower-risk cash machine company.”
Those deserve:
- higher multiples
- lower required returns
3. Low IRR only matters if ROIC < WACC — but that’s NOT the case here
Right now:
- ROIC ≈ 18%
- WACC ≈ 13.5%
- Spread = +4.5% → still creating value
As long as ROIC > WACC:
✔️ The business keeps compounding intrinsic value
✔️ Earnings keep rising
✔️ Valuation premium is justified
✔️ IRR can be low but stock still goes up
This is why KO, UNVR, and Nestlé can compound slowly but still keep high P/E.
⚠️ 4. But—what does this mean for your FUTURE BUYING?
Here’s the real answer:
❌ IRR 5.5%–7% means:
This company is not a good buy for heavy allocation now.
✔️ IRR 5.5%–7% still means:
It is fine to hold as a low-risk, stable compounder.
But if you were thinking of:
- doubling the position
- buying aggressively at 550–600
→ don’t.
The IRR is too low to justify huge size.
Your existing shares will still compound, but new buys have a low return ceiling.
⭐ 5. It is now like mature cash rich company.
Meaning:
- You buy it for stability
- You hold it through cycles
- You don’t expect 20–30% IRR
- You expect 6–12% long-term compounding
This matches it’s current profile.
⭐ 6. Did you buy “too expensive”?
Not exactly.
If you bought at:
- IRR 5.5% → implies very premium valuation
- BUT still acceptable if:
- ROIC stays high
- factories start generating revenue
- earnings reaccelerate next year
Your risk is not loss of capital,
your risk is lower future returns.
Meaning:
- You won’t lose money
- But the position might not be super exciting until EPS jumps
🔥 7. Key point: IRR will go UP automatically if earnings accelerate next year
Remember:
Your IRR is based on today’s earnings.
When factories ramp:
- EPS goes up
- intrinsic value rises
- the implied IRR improves
- even if the price doesn’t fall
So your 5.5% IRR today can become:
- 8–10% IRR after Q2/Q3 2026
without buying more shares.
This happens because:
- earnings increase faster than price
- ROIC expands as capacity is utilized
- growth rate increases
- reinvestment stays low
This is why harvesting mode is powerful.
| Question: So market loves high ROIC company whether they are in growth and in mature… and we enter only when the IRR is make sense to use both in growth or mature… is that right? |
Answer:
Exactly.
1. The market LOVES high-ROIC companies, in BOTH stages:
A. Growth Stage (heavy reinvestment, high ROIC)
- Revenue ↑ fast
- Reinvestment ↑ high
- Free cash flow ↓ low
- ROIC ↑ high
- P/E ↑ high
The market pays a premium because ROIC × Growth creates massive future value.
B. Mature / Harvest Stage (low reinvestment, high ROIC)
- Growth slows modestly
- Reinvestment ↓ low
- FCF ↑ high
- ROIC ↑ stays high or rises again
- Business becomes super stable
- P/E often stays premium
Market loves predictability + cash flow + high ROIC.
So yes — high ROIC wins in ALL stages.
2. When do YOU enter?
You enter when IMPLIED IRR (your required return) makes sense for the stage.
That means:
If the company is in growth mode:
You want:
- IRR ≥ 12–20%
- Because growth is uncertain
- You need margin of safety
- You rely on future expansion to justify valuation
If the company is in mature / harvest mode:
You only need:
- IRR ≥ 7–12%
- Because risk is much lower
- Cash flow is stable
- ROIC is durable
- Earnings volatility is low
- Downside is protected
This is how people invest in Nestlé, Coca-Cola, Unilever, ICBP.
So your statement is EXACTLY correct:
“Market loves high ROIC companies whether growth or mature…”
Yes.
“…and we only enter when the IRR is reasonable for that stage.”
Yes.
That is literally:
- Warren Buffett’s framework
- Terry Smith’s framework
- Chuck Akre’s “Three-Legged Stool”
- Global quality investing playbook
You got it right.
This is the correct full framework
1. ROIC = quality
Determines whether a company deserves premium valuation.
2. Growth rate = upside
Determines how fast intrinsic value compounds.
3. IRR = your entry decision
Determines whether the stock is worth buying today.
With this:
- A + B tells you whether the business is great
- C tells you whether the price is great
| Question: Is it better to buy in growth stage or mature stage? |
Answer:
It depends on your skill, temperament, and the business quality.
If you want the short version:
- Growth stage = higher return, higher risk
- Mature stage = lower return, lower risk
Stage 1: Buying in the GROWTH stage
Pros:
✔️ Highest potential IRR (15–30%+)
✔️ Valuation re-rating + earnings growth both push price
✔️ ROIC is usually expanding → market rewards it
✔️ You catch “S-curve” moments
Cons:
❌ Hard to know if growth is real or sustainable
❌ You must tolerate volatility
❌ Heavy reinvestment → low free cash flow
❌ Market can be overly optimistic (expensive entry)
❌ Execution risk is high (new plants, new markets)
Ideal buyers:
- Skilled analysts
- Long-term thinkers
- Can handle volatility
- Willing to analyze ROIC, reinvestment rate, capex cycles
This is “quality growth investing.”
Stage 2: Buying in the MATURE/HARVEST stage
Pros:
✔️ Much lower business risk
✔️ Free cash flow becomes huge
✔️ Capex drops → cash to shareholders
✔️ Earnings become stable → low volatility
✔️ High ROIC companies dominate here
✔️ Easier to hold for 5–10 years
Cons:
❌ Lower expected IRR (6–12%)
❌ Harder to get multi-bagger returns
❌ Valuation often expensive (P/E 25–35×)
❌ Growth slows → no explosive upside
Ideal buyers:
- Conservative investors
- Wealth preservation focused
- Dividend or cash-flow oriented
- Prefer stability over explosive upside
This is “quality compounder investing.”
SO, WHICH IS BETTER?
If your goal is HIGH RETURNS → buy in GROWTH stage
But only IF:
- ROIC is already high
- Reinvestment is efficient
- Growth is durable
- You understand the industry
- You have a 3–5 year horizon
This is the path to 2×–5× returns.
If your goal is CONSISTENT, SAFE RETURNS → buy in MATURE stage
You get:
- 7–12% IRR
- low volatility
- stable cash flows
- safe P/E multiples
- very low business risk
This is like buying:
- UNVR
- ICBP
- SIDO
- Nestlé
- Coca-Cola
⭐ THE REAL WINNER: Buy in GROWTH stage and hold into MATURE stage.
This is the Buffett model:
- Buy when the company is small, growing, high ROIC
- Hold as it becomes a cash machine
- Enjoy valuation premium + earnings compounding
- Never sell unless ROIC collapses
You collect BOTH:
- growth returns
- AND mature returns
- AND valuation expansion
This is how:
- Coca-Cola became a 100×
- Moody’s became a 20×
- Apple became a 100×
- Starbucks became a 20×
| Question: Never sell unless ROIC collapses… So, we hold but if in mature stage, no reinvestment but ROIC dwindling down, it a sign? And when ROIC dwindling to WACC, we must exit since it enters decline? we exit when ROIC start to decline or when it reaches WACC? |
Answer:
THE GOLDEN RULE OF QUALITY INVESTING
Only hold as long as ROIC > WACC.
Sell when ROIC ≈ WACC and stays there.
Run when ROIC < WACC.
That’s it.
Everything else is a detail.
Why?
Because:
- ROIC > WACC = value creation → business compounds
- ROIC = WACC = value stagnation → business stops compounding
- ROIC < WACC = value destruction → business dies slowly
1. If the company is in MATURE stage but ROIC slowly declines… is that a warning?
Yes — but only if the decline is STRUCTURAL, not temporary.
ROIC can go down temporarily because:
- new factories are not yet used fully (normal)
- demand temporarily slows (normal)
- capex front-loaded (normal)
But if ROIC declines due to:
- competition
- pricing pressure
- regulation
- saturation
- poor management
- bad capital allocation
→ that’s a major warning.
2. Do we exit when ROIC starts to decline?
NO.
ROIC declines all the time — even the best companies have dips.
We only exit if ROIC declines AND shows no sign of recovery.
Meaning:
- 4–6 quarters of declining ROIC
- no new investments producing returns
- no margin recovery
- market shares stagnant
- reinvestment becomes inefficient
This is when decline begins.
3. The REAL EXIT TRIGGER is:
When ROIC ≈ WACC**
Why?
Because when ROIC falls to WACC:
- every dollar reinvested produces zero value
- management destroys shareholder wealth
- business becomes a “bond-like” asset
- multiple compresses permanently
- intrinsic value stops compounding
At this point you MUST exit
→ because the stock becomes “dead money”.
🚨 4. When ROIC < WACC → SELL IMMEDIATELY
This means:
- negative value creation
- capital destruction
- management is failing
- competitive moat collapsing
Once ROIC < WACC for more than 2 quarters:
The company is officially in decline.
