A great business has created enormous wealth for its founding owners and those who bought and held the share. Graduating from a start-up to a company valued in billions, even trillions, of dollars demands two essential ingredients: excellent returns on the capital invested initially, and subsequently returns (true profits) that exceed the opportunity cost of the capital the owners invested.
However, for true financial success a cost of capital-beating return on capital will be insufficient to add value for its owners. It must be accompanied by growth in sales and operating profits. Cash returns can be retained and reinvested in the enterprise to fund its growth. It is a combination of consistently profitable operations plus the willingness and opportunity to grow the business organically or by acquisition that opens the path to greatness.
Growth is always risky and not always worth attempting. The hard-earned savings of the business cash that is retained can easily be wasted. Not all profitable businesses will have sensible opportunities to grow. Think of a highly profitable restaurant with an outstanding owner-manager-chef. There is only one such chef, and the opportunity to add further branches and hire expensive additional chefs may not make sense.
The owner might well be better off not scaling up the business, and rather continuing to pay the profits out to herself and partners, to be invested in a well-diversified portfolio. This is wealth that is more capable of withstanding unpredictable shocks to the dining business.
But a business without ambition will be valued by potential investors accordingly, essentially as you would an annuity that provided a somewhat guaranteed income — discounted heavily by the risk-adjusted cost of capital, reflected in the market for fixed-interest income.
It takes growth, or more precisely the expectation of profitable growth, to encourage investors to pay up for a share — to value a business as worth more than its current profits. Expected but uncertain growth prospects will be recognised and valued accordingly, and be reflected in the share price. It is profitable or unprofitable growth that surprises investors, in either direction, and leads shareholder returns.
SA economy-facing businesses — retailers and banks, for example — often deliver respectable cost of capital-beating returns. But their valuations are heavily deflated by the absence of organic growth opportunities. The economy holds them back, and is widely expected to continue to do so.
For an extraordinary demonstration of the value to shareholders of a combination of high returns on capital combined with unexpectedly strong growth in revenues, operating profits and market value, we can look to the performance of the Magnificent Seven (Mag7) companies listed in New York.
Their current values depend so heavily on future performance that it is impossible to predict with confidence, though they are not lacking in past performance.
These are Nvidia, Apple, Amazon, Meta, Alphabet, Tesla and Microsoft. They demonstrate the value to their owners of an economic transformation under way and of their making. Their future is unknown, as is the future value of all companies in the vanguard of change.
The market value of the Mag7 grew 3.5 times, or about $12-trillion, between January 2020 and June 2025. The market value of chipmaker Nvidia is up 24 times, the next best performer (Tesla) is up nearly 10 times, and the market value of the others is up between two and four times their market values of five years ago.
They are all generously valued, with the ratio of market value to operating cash flows varying between the 400 multiple attached to Tesla and the 50-plus multiples attached to the others. Their sales and operating cash profits have been growing strongly and operating profit margins (sales/operating profits) are impressively high.
Return on capital invested is well above the cost of capital except for Tesla and Amazon. It is over 60% per annum for Nvidia, clearly the outstanding performer in the group by all accounts. Its growth in capex is very strong but is well covered by operating cash flows and revenues.
The rise in its share price and market value has been matched by the growth in operating cash flow. It was expensive five years ago and it is as expensive now, but is also far more valuable. Its growth in capex is strong, but well covered by operating cash flows. Its less risky exposure than some of the other Mag7s is reflected in its outperformance on the share market.
The difficulty for the investor in Nvidia and the other Mag7s is how we value them with any confidence in our calculations of present value. Their current values depend so heavily on future performance that it is impossible to predict with confidence, though they are not lacking in past performance.
Can performance be maintained or better exceeded to the further satisfaction of investors? Can it meet their expectations of revenue growth and justify the risky exposure to capex? We will have to wait and see.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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