Growth & reinvestment quality
What it measures¶
This area asks whether the company is growing in a way it can pay for — not how fast it grows. Growth costs money: a company that wants larger sales usually has to build, hire or acquire first, and the profit it keeps and spends again on the business is its reinvestment. The area judges the quality of growth with four checks:
| Check | The question | Basis |
|---|---|---|
| Gross profitability trend | Did gross profit per unit of assets rise over five years? | own history |
| Asset growth discipline | Did total assets grow 10% a year or less — unless each unit invested earns more than it costs? | absolute |
| Growth paid for | Is the growth consistent with what was reinvested, and does the new capital earn more than it costs? | absolute |
| Efficiency improving | Did each unit of assets bring in more revenue than last year? | own history |
A company not yet making a profit — one with a net loss in each of its latest two fiscal years — is judged on a different route of three checks, because the four above mostly assume profit:
| Check | The question | Basis |
|---|---|---|
| Rule of 40 | Do revenue growth and the free-cash-flow margin add up to at least 40%? | absolute |
| Burn multiple | Was the cash burned no more than twice the new revenue added? | absolute |
| Runway | Would the cash in hand last at least 18 months at the current burn? | absolute |
The tile's sentence also prints the three-year compound annual growth rate of revenue and of diluted earnings per share — the steady yearly rate that would take the first value to the last (see CAGR). Both are there to read; neither is ever counted as a check.
Why it is on the page¶
Fast growth reads well on its own, but studies of many companies find that companies whose assets grow fastest have, on average, delivered weaker results for their owners afterwards, and that multi-year growth rates persist little more than chance would produce. What does persist is whether the business earns more on new capital than the capital costs. That is why the area scores the quality of growth and leaves its speed to the sentence.
Thresholds, their source and the population they were fitted on¶
ROIC is the return on invested capital — operating profit after tax, divided by the money the business uses. WACC is the weighted average cost of capital — the return lenders and owners together require. RONIC is the return on new invested capital.
| Check | Line | Source and fitted population | Evidence grade |
|---|---|---|---|
| Gross profitability trend | five-year change above 0 | Asness, Frazzini and Pedersen, "Quality minus junk": 24 countries | peer-reviewed and replicated |
| Asset growth discipline | 10% a year or less, unless ROIC is above WACC | Fama and French's investment factor (US 1963–2013); Montier's sixth flag | peer-reviewed and replicated / practitioner convention |
| Growth paid for | growth consistent with reinvestment × RONIC, and RONIC above WACC | Koller and colleagues; the Fundamentals page's growth panel | practitioner convention |
| Efficiency improving | asset turnover rose | Piotroski (2000): US companies priced low against the equity on their balance sheet, 1976–1996 | peer-reviewed and replicated |
| Rule of 40 | 40% or more | Bain (2018) and McKinsey (2021), software companies | practitioner convention |
| Burn multiple | 2.0 or less | David Sacks (2020), venture-funded software companies | folklore |
| Runway | 18 months or more | venture investors' convention | folklore |
A worked example¶
Honeywell International, fiscal year 2025, on the statements stored on 25 October 2026:
- Gross profitability trend — passed. Gross profit per unit of assets rose by 2.6 percentage points over five years.
- Asset growth discipline — passed. Total assets shrank by 2.0% in the year.
- Growth paid for — not applicable. There was no net reinvestment to judge.
- Efficiency improving — failed. Asset turnover fell by 0.066.
2 of 3 checks passed · 67% · Good ✓, and the sentence adds Revenue 3-year CAGR 1.8%; diluted EPS 3-year CAGR 0.4%.
NuScale Power, a company developing small nuclear reactors that has not yet made a profit, is judged on the other route: its Rule of 40 reads −1,476.7% (failed), its revenue did not grow so the burn multiple fails, and its runway is 32.7 months (passed) — 1 of 3 checks passed · 33% · Weak ✕, while its revenue grew 38.7% a year over three years.
What “No verdict” means here¶
The tile shows No verdict when fewer than three checks could run. The five-year trend needs statements from five years back, and two checks need the sector's cost of capital from the sector benchmark; a company with a short history or no stored benchmark often reaches only two. The tile names what is missing.
Growth is not a core area: the band's overall figure can still be shown without it.
What the verdict is and is not¶
The verdict counts how many lines of disciplined growth the statements met. Good does not mean the company grew fast, and Weak does not mean it shrank — a fast grower that pays for growth with ever more borrowing or new shares can score lower than a slow one. It is not a forecast of future growth and not an instruction to trade the shares.