There are four pillars to evaluate the future success of ANY company. These include Management, Capital Reinvestment, Triple Digit Growth and comparison of Industry Growth Standards.
Today, we are discussing the importance of Capital Reinvestment.
Management is often faced with two possibilities. First, they can retain the cash and invest it with the goal of increasing the value of the business. This is what we call reinvestment. Second, they can pay out some or all of the cash to shareholders.
This starts to help you unwind why reinvestment is so critical. Anytime you can have The ability to earn earnings – upon earnings – this is the definition of compounding earnings.
I have always felt strongly that the rate at which the value of a business compounds will approximate its return on reinvestment.
Cash flow helps a company grow its business in the economic marketplace. This reinvestment can also be seen in expansion and upgrades to the business.
Business owners and managers can use positive cash flow streams to purchase new equipment or facilities to increase production output. This re-investment process creates a cycle of improving a company’s operations where the business can re-tool operations and find ways to better its position in the economic market.
Companies with strong working capital balances can also avoid external financing, which often includes bank loans that create cash outflows via loan payments.
Another way that you will see capital reinvestment is with stock buybacks. In terms of finance, buybacks can boost shareholder value and share prices while also creating a tax-advantageous opportunity for investors.
While buybacks are important to financial stability, a company’s fundamentals and historical track record are more important to long-term value creation.
And finally, let me speak to the capital reinvestment in a Leadership Team! Most issues are started and ended in the C-Suite. Organizations that demonstrate the greatest levels of performance are those that make workforce issues a top priority. Strategies for improving talent, their working conditions, overall health and wellbeing, and the prevailing business culture start at the highest echelons of management and infuse every other aspect of the company.
In high-growth, high-performing businesses, researchers found that workforce decisions became the focal points for strategic business drivers, and they were made at executive or board levels. Underperformers, on the other hand, brushed aside workforce initiatives as an afterthought in the context of near-term business plans. Like buying back stock.
In summary, look in all areas of the company for this reinvestment of capital. If they believe in themselves enough to put their hard earned dollars right back in – you might want to as well.
When we decide which companies to feature in Solomon’s Picks we look at Management’s Capital Reinvestment