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Chapter 7. Grow, Baby, Grow!: The Growth Story > The Theory: Growth and Value

The Theory: Growth and Value

A company that is expected to have high growth in earnings in the future should generally be worth more than a firm without this growth. Holding everything else constant, increasing growth increases value. But everything else cannot be held constant. To grow faster, you generally have to reinvest more into your business, and it is this requirement that creates a distinction between what can be termed “value creating growth” and “value destroying growth.” Distinguishing between the two is central to a good growth investing strategy.

Growth in a Discounted Cash Flow Valuation

While no one will contest the proposition that growth is valuable, it is possible to pay too much for growth. In this section, you will first look at the fundamental determinants of growth and then extend this discussion to look at the value of growth in both a discounted cash flow model and in relative valuation.


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