Investing in growth companies would be a lot easier if all business growth were created equal, but, unfortunately, it is not.
Investors must be wary of "bad" growth. By bad growth, we mean growth in a business that is likely to produce an unattractive return on the capital invested to generate that growth.
For instance, although all the major airlines were able to achieve substantial growth of their business, Southwest Airlines was the only carrier that was able to generate a level of retun on invested capital that justified the rapid reinvestment in the business.
Bad growth often stems from a "growth for growth's sake" mentality that results in costly acquired growth or misguided attempts to diversify the business.
Investors shold be wary of growth initiatives that depend on the integration of sizable acquired businesses or that stray from a company's core mission.
Investors must be wary of "bad" growth. By bad growth, we mean growth in a business that is likely to produce an unattractive return on the capital invested to generate that growth.
For instance, although all the major airlines were able to achieve substantial growth of their business, Southwest Airlines was the only carrier that was able to generate a level of retun on invested capital that justified the rapid reinvestment in the business.
Bad growth often stems from a "growth for growth's sake" mentality that results in costly acquired growth or misguided attempts to diversify the business.
Investors shold be wary of growth initiatives that depend on the integration of sizable acquired businesses or that stray from a company's core mission.
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