skills/full-company-analysis/references/modules/M030-capital-intensity-and-reinvestment-runway.md

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<!-- Module: 030 | Title: Capital Intensity and Reinvestment Runway -->

## PART VI - BUSINESS QUALITY | MODULE 030

# Capital Intensity and Reinvestment Runway

> Mission. Estimate incremental returns on capital, reinvestment capacity, and limits to compounding.

## Decision output

Objective: Estimate incremental returns on capital, reinvestment capacity, and limits to compounding. The completed work product must be reproducible from evidence, show the downstream financial or decision effect when material, state the strongest contrary case, and define a dated update rule.

## Explicit operating procedure

1. Map the capital required to acquire customers, build capacity, fund working capital, develop technology, obtain licenses, maintain assets, and replace depreciating productive resources.

1. Separate maintenance from growth investment and identify off-P&L investments such as capitalized software, commissions, R&D economics, customer incentives, or acquisition spending where relevant.

1. Calculate ROIC and incremental ROIC using consistent operating profit and invested-capital definitions over a period long enough for investment to mature.

1. Estimate reinvestment capacity: how much attractive capital can the company deploy before market size, execution, regulation, infrastructure, or returns become limiting?

1. Model growth as reinvestment multiplied by incremental return, with timing lags and capacity ramps. Do not assume high historical ROIC automatically persists as the asset base expands.

1. Use the analysis to distinguish compounders with long high-return runways from businesses whose growth consumes capital at falling returns.

## Required evidence and model bridge

- Primary-source set: KPI history, customer cohorts, pricing evidence, cost structure, capital requirements. Preserve exact document/version, date, period, and source location for every material factual input used in capital intensity and reinvestment runway.

- For each key concept - invested capital, maintenance investment, growth investment, incremental ROIC, reinvestment rate, market runway - state whether it is a reported fact, analyst calculation, management claim, external estimate, or judgment. Quantitative concepts must retain raw components and units; qualitative concepts must retain the specific evidence and counterevidence.

- Map only economically relevant findings into the model or decision record. Process-control modules such as capital intensity and reinvestment runway may have no direct valuation line; in that case document the downstream error or governance risk the control prevents.

## Metrics and calculation controls

| Metric / concept | Construction | Required validation |
| --- | --- | --- |
| ROIC | ROIC = NOPAT / average invested capital | ROIC: Recalculate ROIC from cited inputs; reconcile definition, period, units, signs, and source version; investigate and document any variance before use. |
| incremental ROIC | ROIC = NOPAT / average invested capital | incremental ROIC: Recalculate incremental ROIC from cited inputs; reconcile definition, period, units, signs, and source version; investigate and document any variance before use. |
| reinvestment rate | Growth investment divided by after-tax operating profit, or equivalently long-run growth divided by incremental ROIC when using a value-creation framework. | reinvestment rate: Recalculate from same-scope numerator and denominator; confirm period, units, cohort/geography, and issuer definition; reconcile material differences to filings or operating data. |
| sustainable growth | sustainable growth = current period / comparable prior period - 1; decompose organic, price, volume, mix, FX, and M&A where material. | sustainable growth: Recalculate sustainable growth from cited inputs; reconcile definition, period, units, signs, and source version; investigate and document any variance before use. |



## Worked application

> Case: a 15% ROIC business can create more value than a 25% ROIC business if its reinvestment runway is much longer.

- Reconstruct the relevant reported fact from primary evidence before interpreting the case. For capital intensity and reinvestment runway, show the raw components rather than only the resulting ratio or narrative.

- Build the causal chain through invested capital, maintenance investment, growth investment, incremental ROIC, then identify which link is directly observed and which link remains an assumption.

- Calculate ROIC, incremental ROIC, reinvestment rate, sustainable growth from sourced components under the reported/base interpretation and at least one skeptical alternative interpretation.

- Translate the difference between cases into the variable that matters for capital intensity and reinvestment runway: evidence quality, revenue, operating profit/NOPAT, free cash flow, invested capital, financing/dilution, risk, or valuation. Mark non-applicable links instead of inventing them.

- Expert consistency test: reconcile terminal growth with required reinvestment and terminal returns.

- Precommit the specific future filing, KPI, customer/supplier observation, regulator action, or market input that would materially invalidate the capital intensity and reinvestment runway conclusion.

## Failure tests

- FAIL if invested capital cannot be defined and reproduced from the source pack.

- FAIL if growth is forecast without the working capital, fixed assets, R&D, acquisition, customer acquisition, or other economic investment needed to support it.

- FAIL if the capital intensity and reinvestment runway conclusion depends on an unstated assumption, unreconciled definition, or evidence that cannot be traced to its source/version.

- FAIL if evidence materially inconsistent with the capital intensity and reinvestment runway conclusion is omitted, reclassified, or dismissed without a documented definition, materiality, causal, timing, and source-quality analysis.

## Completion test

A senior reviewer must be able to reproduce the capital intensity and reinvestment runway conclusion, vary the most sensitive assumption independently, trace the change through the model, understand the strongest opposing case, and identify the next evidence that would force an update. If any link is missing, the module remains open.