Ep 3 – What is good growth that is shareholder accretive

Please find below the transcript for our snippet video:

At Itus, we invest in businesses which have the potential to show future cash flow growth. However, not all growth is good and it’s important to distinguish the levers that drive shareholder returns.

Any business requires cash as its raw material for growth. A business that can translate its earnings into cash flows provides the management with the bandwidth to reinvest them for future growth and this can come in the form of capex, technology, people or R&D. There are businesses which show growth where the top line growth is masked with increase in either receivables, inventory or a poor accounting policy from the management – these are businesses we would surely want to be avoiding.

The second lever that distinguishes ordinary businesses from great businesses is the ability to generate a return on capital which is at least one and a half to two times the cost of capital. A business whose return on capital is consistently below the cost of capital tends to destroy shareholder value over long periods of time.

When these two levers of growth, the cash flow growth along with the return on capital work in tandem, the potential to generate long term returns increases significantly.