If a business does not generate attractive returns on the capital it already employs, adding more capital rarely fixes the problem. Most growth narratives fail this test surprisingly quickly.

Of course, there is an exception. Some businesses deliberately operate with depressed returns in the early stages of their expansion in order to build scale, density or infrastructure that will support structurally higher margins in the future.

This is common in platform models, logistics-heavy networks and certain consumer ecosystems. In these cases, short-term ROIC can look unattractive while long-term economics may still be compelling.

The problem is that this narrative is extremely easy to sell. Almost every low-return growth story claims that operating leverage, scale and future efficiency will eventually transform the business into a high-return compounder. But very few actually do.

The distinction between genuine scale-driven economics and permanent structural inefficiency is one of the hardest and most important judgments an investor has to make.

Investors should be especially skeptical when the improvement in returns depends primarily on optimistic assumptions about future margins, rather than on visible changes in cost structure, asset intensity or pricing power.

Growth is not the objective. Value creation is. When a business already earns high returns on capital, growth amplifies a good spread. It turns competitive advantage into compounding.

When a business earns poor returns on capital, growth only amplifies a bad spread. It scales inefficiency, not value. This is why the most dangerous words in investing are, “Returns will improve later.” Sometimes they do. Most of the time, they don’t.

And while growth stories may look impressive in earnings calls and investor decks, only one thing compounds your wealth over time. Reinvesting capital at returns meaningfully above its cost.

Everything else is just a bigger business. Not a more valuable one.

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