Growing a company without capital

Nadav Manham from SeekingAlpha posted such a simple but profound thought on when companies can grow without capital (The Tyranny of Corporate Capital Allocation: Who's Really the Investor?)

With very few exceptions, a company's ability to grow its intrinsic value over time is basically equivalent to its ability to allocate capital. The growth in [ intrinsic value ] tracks closely the amount of capital added to the enterprise over time, which in turn depends on how much capital the enterprise generates, how much it retains, and the return on the capital generated and retained (and reinvested, etc. etc.), which in turn is what we mean by "the ability to allocate capital."

I can think of only three exceptions to this rule. One is companies like eBay that benefit from network effects--once they get their mousetrap going, it grows without their having to add more capital to it. Another is companies like Dell in its heyday, who have such good working capital dynamics that their customers essentially provide the capital needed to grow. The third is companies that can simply raise prices year in and year out, like newspapers once upon a time.

Simple and elegant.

Comments

[warcraft gold]

Great ideas. This can be inspiring for those who want to cope up with the recession.