When investors can tap their capital into companies that do everything (or almost everything) right, they should not ignore the opportunity to turn their portfolios into their most valuable assets yet. The effects of compounding returns are of massive importance, and they can typically be achieved in two main ways.
First, choose companies that generate enough returns on their invested capital (ROIC) through a mix of growing top-line revenue and high margins to allow management to retain and reinvest enough capital to keep creating value and compounding in the same business. The second aspect of this formula is paying the right price for these cash flows and compounding returns, which is where valuation multiples come into play.
