I love a great growth company as much as the next stock junkie, but growth for growth's sake just doesn't cut it for me. I want to see a company grow Foolishly, creating value even as it expands.
Why isn't growth enough? Let's say I start a business that earns 10% returns on capital. Unfortunately, it cost me 12% to get the capital I needed to get my business up and running. That means my business doesn't generate enough of a return to pay back my investors. The more I grow, the further into the hole I sink. That's not very Foolish.
Online retailing giant Amazon.com (Nasdaq: AMZN) has produced Foolish growth for some time now. Its return on invested capital remains greater than 15%, while most companies' cost of capital comes in between 8% and 12%. So not only is it creating value, it's growing faster than the competition, as the following table shows:
|
Company |
5-Year Sales Growth |
ROIC |
|---|---|---|
|
Amazon.com |
30.2% |
86.0% |
|
eBay (Nasdaq: EBAY) |
18.5% |
14.1% |
|
Books-A-Million (Nasdaq: BAMM) |
1.2% |
11.9% |
The Foolish bottom line
Value and growth are joined at the hip. If a company's management can't find ways to grow sales while earning positive spreads on its investments along the way, I'd just as soon keep my capital in my pocket. Fortunately, Amazon.com's track record of creating value as it grows makes it well worth considering.
