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Reinvestment Runway
The rule
A high return on money is only a giant winner if the business can keep putting its profits back at that same high rate for many years.
Where it flips
A long runway assumed on faith can flatter a fading business. Managers may keep reinvesting into projects that quietly earn far less than the old ones. The fix: check that fresh money is really still earning the old high return, not just being spent to look like growth.
Earning 25% on money once is nice. Earning 25% again and again on a slowly growing pile of money, year after year, is what turns a small stock into a huge one. So do not just ask how good the returns are. Ask how long the company can keep finding new places to put its cash to work at those returns. A short runway means the growth stalls early, however good the rate looks today.
A worked example
Aayra owns a chain earning 24% on its money that keeps opening new stores across smaller Indian cities. Because it can put almost all its ₹100 crore profit back to work at that rate, her holding roughly doubles every three years. A rival with the same 24% but no room to grow just pays it out and stays flat. [illustrative]
How to spot it
- ·Large untapped market still ahead
- ·High return on each new rupee invested
- ·Profits reinvested, not paid out
Christopher Mayer · 100 Baggers