Growth

In the world of investing, Growth refers to the increase in a company's specific metrics over a period of time. Think of it as a company's financial report card showing how much it has improved. While investors often look at the growth in a company's stock price, that's a result, not the cause. True business growth is measured by fundamental numbers like revenue (the total sales), earnings (the profit), and cash flow (the actual cash generated). A company that consistently grows these figures is like a sapling turning into a mighty oak; it's getting stronger, bigger, and creating more value for its owners (the shareholders). For investors, a company's ability to grow is a powerful engine for long-term wealth creation. However, the pursuit of growth can be a siren's song, luring investors toward exciting stories while distracting them from the most important question: what is a reasonable price to pay for that growth?

Wall Street loves to create neat boxes, and one of its favorites is pitting Growth Investing against value investing.

• Growth Investing is a strategy focused on buying companies that are expected to grow at a much faster rate than the rest of the market. These investors are often willing to pay high prices for stocks, measured by metrics like the Price-to-Earnings (P/E) Ratio, believing that rapid future growth will more than justify the premium price paid today. They're chasing the next Amazon or Google.
• Value Investing, the philosophy of this dictionary, takes a different view. A true value investor doesn't see growth as the opposite of value; they see it as a component of value. The legendary investor Warren Buffett, guided by his partner Charlie Munger, famously evolved from the strict, bargain-hunting style of his mentor Benjamin Graham to embrace this idea. Buffett's insight was that growth is only a positive for a business if it can be achieved at a good Return on Invested Capital. In simple terms, growth is wonderful, but it must be profitable and it must be bought at a sensible price. This middle-ground approach is sometimes called “Growth at a Reasonable Price” (GARP).

The bottom line is that for a value investor, the question isn't “Is this a growth company?” but rather, “How much is this company's future growth worth today, and can I buy it for less than that?”

Not all growth is created equal. A savvy investor learns to look under the hood to assess its quality and sustainability.

While there are many ways to track growth, a few key metrics tell most of the story:

1. Revenue Growth: Often called “top-line” growth, this shows if the company is selling more of its products or services. It's the most basic sign of expansion.
2. Earnings Per Share (EPS) Growth: This measures how much profit the company is making for each share of its stock. Ultimately, growing profits are what drive stock prices over the long run.
3. Free Cash Flow (FCF) Growth: This is the gold standard for many seasoned investors. FCF is the actual cash left over after a company pays for its operations and investments. It's much harder to manipulate with accounting tricks than earnings, and it represents the real cash a company can use to pay dividends, buy back shares, or reinvest for more growth.

Beyond the numbers, you must ask how the company is growing.

• Organic vs. Acquisitive: Is the growth organic (coming from its own operations, like selling more iPhones) or acquisitive (coming from buying other companies)? Organic growth is generally considered higher quality and more sustainable. A company that relies on constantly buying other businesses can be riskier and may be hiding weakness in its core operations.
• Profitable Growth: Is the growth actually making the company more valuable? Some companies “buy” growth by slashing prices and destroying their profit margins. A key sign of high-quality growth is a high and stable Return on Invested Capital (ROIC). A company with a high ROIC is like a master chef who can turn a few simple ingredients into a gourmet meal; it's incredibly efficient at turning its capital into more profit.
• Sustainable Growth: Will this growth last? This is where the concept of an economic moat comes in. A company with a wide moat—a powerful brand, a network effect, or low-cost production—can protect its profits and market share from competitors, allowing it to grow for decades.

This is the most critical lesson. A wonderful, fast-growing company can be a terrible investment if you pay too much for it. The price you pay determines your return. Imagine two people buy the exact same high-growth company. Investor A buys it when it's hyped up, trading at 100x its earnings. Investor B buys it months later during a market panic when the price has fallen by 50%, and it's now trading at 50x earnings. Even though it's the same great company, Investor B's future returns will be dramatically higher simply because they paid a more reasonable price. A value investor always starts with an estimate of a business's Intrinsic Value—a calculation of what it's truly worth based on its future cash flows (including its growth). The goal is to then buy the stock only when it trades at a significant discount to that value, creating a Margin of Safety. Growth is a crucial input in this calculation, but it isn't the calculation itself.