In his recent interview on the Infinite Loops Podcast, Jake Taylor explains why return on investing capital is like weightlifting. Here’s an excerpt from the interview:
But to go back to return on invested capital, that’s really important when it comes to growth. So when you think about a business that’s growing, you can grow and grow and grow, but if you are giving away a dollar for 80 cents over and over again, growth is not a good thing then even if you are VC subsidized.
I should caveat this, that there’s some nuance to it in that it’s possible when you reach a certain scale, especially for a network business, where you all of a sudden become wildly profitable, but you had to invest a long way to get the network scaled up to a certain size and inertia.
So it’s not quite as simple as like, oh, low return on invested capital, equals bad business, but over a long enough period of time, we can start to say that. If you have a low return on invested capital of your projects as a business person, growing it may not be the right thing for you to do.
In fact, maybe shrinking and retrenching and getting your returns on capital back up, and then growing from that base is probably the right strategy. So return on invested capital is I likened it to actually like weightlifting in that the return of invested capital is the form that you’re using to lift the weights.
You want to make sure you’re having good form. Now, if you have bad form and you load a bunch of growth, you load a bunch of weights on there, it’s going to crush it and destroy it. Right? So you have to make sure that you’re keeping good form the whole time as you’re growing.
You can listen to the entire interview here:
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