The 4 Different Types Of Growth

The 4 Different Types Of Growth
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The 4 Different Types Of Growth by Goh Tee Leng, Value Edge

It is broadly true that growth is a very strong, if not the strongest, driver of stock valuations. However, the impact of growth depends on its source and nature. There are 4 different types of growth.

Growth due to reinvestment at cost of capital

Cost of capital refers to the opportunity cost due to the next best alternative forgone for your capital. If the reinvestment yield is equal to the cost of capital, it basically implies that every dollar of capital only earns you a dollar of marginal revenue. Growth of this nature has no value and should not affect stock price or intrinsic value.

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Growth due to reinvestment at a premium to cost of capital

Reinvestment at a return higher than the cost of capital is a value-add to intrinsic value. This is the ideal form of growth that investors should seek. Conversely, if the company reinvests at an incremental return that is below the cost of capital will destroy value. Growth of such nature can be extremely misleading and dangerous. One common red flag is if a company’s growth is mainly fueled by acquisitions.

Inflationary Growth


Growth resulting from a general increase in price level results in a lower multiple. This is offset by higher earnings, so unfortunately the net impact on intrinsic value is uncertain. Cost of capital increases with in line with inflation. I would think that intrinsic value remains constant most of the time. Of course, this also depends on the industry of the company. For example, consumer companies are usually able to pass on price increases to customers while the same cannot be said for REITs.

Efficiency Gains

Productivity gains that result from cost control or economies of scale are a valuable source of growth. Essentially, such growth is ‘free’ as they do not require any additional investment. As such, it most certainly increases the intrinsic value of the firm.

Final Words

Distinguishing between the different types of growth is detrimental for an investors, especially if he is paying a price for it. Without being certain of the nature of growth, investors will be safer staying with low growth, value stocks.


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I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.

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