Growth Factor
A business’ growth factor consists of two parts: the return on capital and the amount of unrealized growth within the franchise. The former governs profitability; the later governs growth.
Only a company that earns an extraordinary return on capital and can deploy additional capital within the franchise can be said to have a truly profitable growth factor. If a business’ return on capital is less than or equal to the average return on capital in the economy, then it does not have a positive growth factor regardless of its earnings growth rate. A company with a very high return on capital and no room left to deploy capital within the franchise will likewise not have a positive growth factor.
(Return on Capital – Avg. Return on Capital)* Franchise Growth = Growth Factor