Growth paid for
What it measures¶
Growth has to be paid for: to make more sales next year, a company usually spends this year on equipment and on stock and credit for its customers. Corporate finance states this as one identity:
growth = reinvestment rate × return on new invested capital
- NOPAT is net operating profit after tax — operating profit minus the tax on it.
- The reinvestment rate is the share of NOPAT spent again on the business: capital expenditure plus the increase in working capital (current assets minus current liabilities), minus depreciation and amortisation, all divided by NOPAT.
- RONIC, the return on new invested capital, is what the year's revenue growth implies: growth ÷ reinvestment rate.
This check asks two things: is the implied RONIC believable — no more than 1.5 times the company's return on all its invested capital (ROIC) — and is it above the cost of capital (WACC)?
Why it is on the page¶
A company can only grow fast on little reinvestment if each unit it reinvests earns a great deal. When the identity implies a return far above anything the company earns today, the growth may be paid for some other way — by borrowing, by acquisitions, or by a cycle that will not repeat. The identity is central to the valuation textbook by Tim Koller and colleagues at McKinsey, and the Fundamentals page's growth panel uses the same arithmetic.
Thresholds, their source and the population they were fitted on¶
| Result | When |
|---|---|
| ✓ passed | implied RONIC is at most 1.5 times ROIC, and above the sector's cost of capital |
| ✕ failed | either condition is not met |
| ○ not evaluable | revenue, capital spending or working capital is not stored, or no sector cost of capital is known |
| ○ not applicable | NOPAT is not positive, or there was no net reinvestment |
- Source: Koller, Goedhart and Wessels, Valuation (McKinsey & Company); the tolerance of 1.5 times ROIC is the product's own, shared with the Fundamentals page's growth panel.
- Fitted on: no statistical sample — an accounting identity with a design tolerance.
- Evidence grade: practitioner convention.
- Basis: absolute.
A worked example¶
Honeywell International, fiscal year 2025 (statements stored on 25 October 2026): depreciation exceeded capital spending and the working-capital change, so there was no net reinvestment — the check was not applicable and left the count.
From the Fundamentals page, as described in the product's field guide (Celestica, fiscal year 2025, read on 9 August 2026): revenue grew 28.46% on a reinvestment rate of 30.59%, implying a RONIC of 93.02% — more than 1.5 times the company's ROIC of 36.59%, so on these figures the growth would not read as paid for.
What “No verdict” means here¶
The check is not evaluable when an input of the identity is missing, or when no sector benchmark gives the cost of capital; it is not applicable when there is no positive operating profit or no net reinvestment to judge. In each case the reason is named and the check leaves the area's count.
What the verdict is and is not¶
A pass says the year's growth is consistent with what was reinvested, at a return above the cost of capital. A failure says the identity does not close on the stored figures — not that the growth is false. It is not a forecast and not an instruction to trade the shares. See also RONIC and the reinvestment rate.