What's the purpose of investment rate indicator?

Question

I'm reading Value: The Four Cornerstones of Corporate Finance, and quote

Growth, ROIC, and cash flow (as represented by the investment rate) are tied together mathematically in the following relationship:

Investment Rate = Growth / ROIC

Because the three variables are tied together, you only need two to know the third, so you can describe a company's performance with any two of the variables. From an economic perspective, describing a company in terms of growth and ROIC is most insightful. Value's growth rate is 5 percent and its ROIC is 20 percent, while Volume's growth rate is also 5 percent, but its ROIC is only 10 percent.

I don't really understand how this formula works. From previous chapter it looks like both Growth and ROIC should be as high as possible, then why should we divide one by the other?

Answer 1

Investment rate is simply the amount of profit that the company keeps for itself versus paying out to shareholders in dividends. If it makes 10% on its capital but pays 5% in dividends (which means it keeps 5%) then its "investment rate" is 50% ((10%-5%)/10%).

From previous chapter it looks like both Growth and ROIC should be as high as possible

Yes but it's the proportion that some people look at. Is the company investing in itself, or is it returning profit to its shareholders? Value investors tend to want companies to reinvest as much as possible. Other investors look at companies more as cash engines (dividends) and are not as interested in growth if it means their money is locked up.