# Growth and reinvestment returns

**FUND-06 · Fundamentals · Core**

**Lesson question:** Does becoming larger create owner value?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** FUND-01

Growth creates value when returns on the capital required exceed an appropriate capital cost. Expanding low-return projects can increase revenue and earnings while reducing economic value.

Study reinvestment efficiency as well as the growth rate.

## Understand the mechanism

A simple ROIC measure divides after-tax operating profit by invested capital. Definitions must be consistent and the capital-cost comparison is uncertain.

Historical average returns can hide weak returns on new projects. Acquisitions and dilution also carry costs even when headline revenue accelerates.

## Walk through the process

Estimate incremental capital needs and plausible returns. Tie forecasts to product economics and capacity rather than assuming unchanged efficiency.

Use scenarios for tax rates, margins and capital cost; do not present a precise model spread as a guaranteed value creation rate.

## Evidence and decision boundary

These are original fictional teaching figures, not a company screen. Actual analysis should use primary disclosures and distinguish management's explanation from your inference. Favorable or unfavorable evidence depends on the specific business, valuation and risk; no single ratio establishes a recommendation.

## A worked example

Harbor EBIT 150 with an illustrative 20% operating tax rate gives NOPAT 120. On 1,000 invested capital, ROIC is 12%. Against an assumed 9% capital cost, economic profit is 120−90=30.

A new 200-capital project at 6% earns 12 against an 18 capital charge, destroying six under that model despite adding accounting earnings. The graph varies return above and below the assumed hurdle.

## Calculation popup: Reproduce the financial calculation

```text
ROIC=NOPAT/invested capital
```

Fictional figures; definitions and periods must match.

1. 150×(1−.20)=120.

2. 120/1,000=12%.

3. 120−.09×1,000=30.

**Result:** 12% ROIC; 30 million economic profit under assumptions.

## Graph: Growth and reinvestment returns—worked comparison

**Horizontal:** ROIC assumption (%)  
**Vertical:** Economic profit (USD millions)

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/fundamentals/FUND-06.js` and displayed as an accessible table in the HTML lesson.

## What would invalidate the reading?

Buying growth at any price confuses expansion with value. Selectively excluding acquisition capital can inflate reported investment returns.

## Check your understanding

### What is ROIC from 120 NOPAT and 1,000 invested capital?

**Answer:** 12%.

**Why:** The definitions and uncertain hurdle must also be stated.

### What is the critical failure to avoid?

**Answer:** Buying growth at any price confuses expansion with value. Selectively excluding acquisition capital can inflate reported investment returns.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: Does becoming larger create owner value? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [SEC Financial Statements Guide](https://www.sec.gov/about/reports-publications/beginners-guide-financial-statements)