What is ROIC fade?
ROIC fade is the assumption that a company's return on invested capital drifts down toward its cost of capital as competitors arrive. A valuation that holds today's high returns forever is assuming competition never shows up. Fading them is the base case the historical record supports for most businesses.
How it works
Return on invested capital is what a business earns on the money tied up in it. When that sits well above the cost of capital, the business is creating value — and it is also advertising an opportunity. Capital follows unusually good returns, and the arrival of that capital is what pulls them back down.
A cash-flow model has to take a position on this, whether or not it says so. Holding today's return constant through the forecast is a position: it assumes the moat never erodes. Fading it toward the cost of capital over the forecast is the other, and it is the one the long-run cross-section of company returns supports for the typical firm.
Fade is a default, not a verdict on a particular company. A business with a genuine structural advantage may hold high returns far longer than the average, and the way to express that is to fade more slowly and say why — not to switch the assumption off and let the terminal value quietly carry the whole thesis.
Watch what fade does to a valuation and you learn where the value was coming from. If a modest fade collapses the number, the model was being carried by a permanent-advantage assumption rather than by the near-term cash flows.
Where you see this in the terminal
The valuation enginewhere fade sits in the model, and the convention used by default
Moat traitsthe observable traits that argue a business should fade more slowly
Screenerthe return-on-capital column, so a claimed advantage can be sized against its peers
The conventions behind it
What this page explains in plain language, the methodology documents state as conventions: the inputs, what is rejected, and the stated limits.
More of these: every concept page. The full transparency index is at Methodology.