🚀 A new class of compounder? Measuring growth through assets

I’m excited to share some of my latest research. The aim was to look for companies that are growing their total assets, at a consistent rate, corrected for goodwill.

Balance sheet growth vs income statement growth

When looking for growing companies, investors typically head straight to the income statement and look for revenue growth. Those with an understanding of accounting are likely to then want to see how revenue growth compares with free cash flow per share growth. And investors who are more shrewd and insightful will also want to see how growth links to the company’s order book, backlog and forecasted orders, to get a sense of whether growth will continue.

But what about the balance sheet?

Total assets are the sum total of everything a company owns, including its cash, and can be a useful indicator of a company’s expansion.

In order to grow total assets, a company needs to be profitable and retaining those profits onto the balance sheet (i.e. not distributing the profits through buybacks and dividend payments). The company then needs to be using those profits to buy assets that will contribute to further profit growth in the years to come. For companies that make investments, they will also want to see the market value of their assets rise.

So what is the optimal balance sheet metric to track growth? The problem with using total assets is that it includes goodwill, which is a plug variable used by accountants, typically when a company has overpaid during M&A. Excluding goodwill gives a better picture of the company.

The balance sheet is a snapshot in time of a company's financial health. It's a bit like standing on scales to measure your weight. Both give you a number that reflects the current circumstance, but neither indicates the trend and whether things are going up or down.

So the aim of my latest research was to look for companies that are growing their total assets (corrected for goodwill). This therefore captures growth in both tangible assets (such as property and equipment) and intangible assets (such as software assets and other IP). For the remainder of this note, when I refer to total assets, I am referring to total assets minus goodwill.

Over the last 10 years, the US public company that has grown its share price at the highest rate is NVIDIA. It has compounded at 78% per year. Interestingly over the same time frame they've compounded their total assets by only 32% per year. For comparison their FCF per share has compounded at 71%, suggesting that their share price has tracked this number more than total assets.

Now let's look at some of the companies that have grown their total assets the most over the last 10 years. I've only looked for consistent growth, so applied a correlation function to the analysis and removed any company where the growth rate had a R-Squared value less than 0.90. For context, the closer to 1.00 the closer the data is perfectly linear or exponential.