value
Growth can destroy value
The rule
Growth that eats more money than it gives back makes the business bigger and the owner poorer.
Where it flips
Not all reinvestment is bad. High-return growth is the best thing an owner can have. The fix is to judge growth by its return on money, not its speed. Profitable growth builds; money-losing growth consumes.
Growth is good only if each rupee put back in earns more than it costs. A company that pours money into expansion at low or negative returns is not building wealth. It is burning it, just on a bigger scale each year. Fast sales growth can hide this 'money-losing growth' for a long time before the poor returns show up.
A worked example
A chain doubles its stores every year, but each new store earns just 4% on the money it swallows while that money costs 12%. Sales soar, the share looks exciting, and yet every rupee of growth quietly subtracts value. [illustrative]
How to spot it
- ·rising sales with falling returns on money
- ·growth funded by constant fresh debt or new shares
- ·a story about size, not about returns
Warren Buffett · Value investing writing