The gardener must sow seed in fertile ground for a garden to grow. Once planted, young seedlings must be cared for and cultivated. If all goes well, the seed grows into an abundant garden, while also producing the seed and nutrients for next year’s plantings. In this way, the gardener achieves a sustained cycle of growth, and everyone benefits.

The same is true for a business. Like a seed, a firm must sow investments in assets that yield a profit if it hopes to grow. Additionally, investments will be subject to risk and unknowns, some will produce profit, and some will not. In other words, the entrepreneur must take a risk if the business is to grow. But if investment in productive assets leads to profit, the stage for growth is set.

How Growth Works (In Theory)

We would like to propose that a direct but imprecise relationship between investment and profitability actually does exist. To test this simple idea, we first need to describe what we mean by “sustainable growth.”

Like our garden example, our definition of “sustainable growth” will see investment in assets like the “seed” in the garden and the asset’s profitability as synonymous with “fertility.” The right mixture of investment and profitability should, according to our theory, create organic, sustainable growth. For example, if ABC company invests 50% of available incoming funds in new assets (returning the other 50% to shareholders) and those assets that produce a 10% profit, then sustainable growth would be 5% (50% x 10% = 5%). The intuition is simple here — higher investment and profitability should cause higher growth, all else being equal.

How Growth Works (In the Real World)

Of course, as with gardening, not all investment “seeds” grow at all, as some die off and other investments grow unexpectedly tall. Yet, there is a clear and undeniable line of causation directly from investment in profitable assets to resulting growth. At the risk of stating the obvious, profitable investments really do tend to drive growth.

To test if there is any evidence in the real world to support the “sustainable growth” theory, we looked at data on the hundred largest non-financial U.S. companies by market value. We plotted the theoretical “sustainable growth” based on our growth formula and the last five years of data on the bottom axis. We then plotted the corresponding actual observed sales growth rate on the vertical axis for each company (chart below). A clear and positive, albeit imperfect, relationship can be seen between the theoretical and actual growth patterns.

Comparing “Theoretical” vs. “Real World” Growth
100 Largest U.S. Non-Financial Companies, Last 5 Yrs

We found that these giant firms averaged $1.3 trillion of available funds each year over the past five years. Available funds include funds from operations, drawdown of cash on hand, net debt issuance, and other sources. About $750 billion was invested back into new assets from these funds with the remaining $550 billion paid to shareholders through dividends and net share buybacks. Investments included acquisitions, fixed and intangible asset purchases, research and development, and other types of investment. In other words, about 60% of available funds were reinvested for future growth and 40% was paid to owners (shareholders).

What about profitability? The firms’ boasted average assets of $9 trillion and generated operating cash of $1.2 trillion, making the assets’ operating profitability about 13% ($1.2 trillion operating profit / $9 trillion assets = 13% operating profitability). So, by our measure, sustainable top-line growth should be close to 7% (60% reinvestment rate times 13% operating profitability ≈ 7.5% “sustainable growth”).

What actually happened? Over the five-year period, the firms delivered average top-line growth near 7%, just shy of our 7.5% theoretical growth estimate.


As you can see, while growth may often seem like it arises from a “magic” garden, it actually originates from easy-to-understand fundamental causes. And while there is no way to perfectly predict growth, most growth can be traced to investment in productive and profitable assets.

At Washington Crossing, we believe we are value investors who care not only about the price paid but also what we are buying. The practice of evaluating price to quality and growth is essential in our view.

Kevin R. Caron, CFA
Senior Portfolio Manager

Chad Morganlander
Senior Portfolio Manager

Matthew Battipaglia
Portfolio Manager

Steve Lerit, CFA
Senior Risk Manager

Paul Clark, CFA
Senior Portfolio Manager
Municipal Fixed Income

Rick Marrone
Senior Portfolio Manager
Municipal Fixed Income

Daniel Urbanowicz
Senior Portfolio Manager
Municipal Fixed Income

Suzanne Ashley
Internal Relationship Manager

Eric Needham
Director, External Sales and Marketing

Jeffrey Battipaglia
External Sales and Marketing


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