There's a right way and a wrong way for businesses to grow.
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.
Navigation product specialist Garmin (Nasdaq: GRMN) has produced Foolish growth for some time now. Its return on invested capital (ROIC) remains greater than 15%, while most companies' cost of capital comes in between 8% and 12%. So it's not only creating value, but also growing faster than the competition, as the following table shows:
|
Company |
5-Yr Sales Growth |
ROIC |
|---|---|---|
|
Garmin |
28% |
30.4% |
|
L-3 Communications (NYSE: LLL) |
15.1% |
9.4% |
|
Nokia (NYSE: NOK) |
5.3% |
4.9% |
Source: Capital IQ, a division of Standard & Poor's, and author's calculations.
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, Garmin's track record of creating value as it grows makes it well worth considering.
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