Spread over cost of capital

Return on invested capital minus the weighted average cost of capital. It is the single number that says whether a business creates value.

A company earning 20% on capital that costs 11.5% runs an 8.5 point spread. Every rupee it reinvests turns into more than a rupee of value.

Reverse the signs and the logic reverses with them. A firm earning 9% on capital costing 11.5% destroys value with every rupee it retains, and the fastest way for it to help its owners is to stop growing and return the money. Managements almost never do this, which is why capital allocation is the part of the annual report worth reading twice.

Competition pushes spreads toward zero over time, and the whole subject of moats is the study of why some businesses hold theirs for decades.

Growth without a spread is just a larger version of the same problem.