Growth at all costs has been the name of the game for many companies over the last few years. But capital costs have risen, and it has punished the growth-at-a-reasonable-price crowd. What strategy should companies and stockpickers follow? They should remember the nuanced rule of growth—it doesn't always create value. In fact, sometimes, it destroys value.
First, growth will create value when the return on capital is greater than the cost of that capital. Capital, like any commodity, has a cost and a sales price. The difference between the two is the profit or loss. You will lose money if you buy something for $10 and sell it for $8. Growing that enterprise, and selling more of the same thing at the same loss, won't increase its value—the present value of all future cash flows. In the same way, if you take capital that costs 10% and reinvest in a project that makes 8%, you will destroy value.
Of course, there is nuance to this. If, by selling more, you can lower …