By Compounding Academy
This is the next issue in our What Makes a Quality Business miniseries. Today we focus on two essential traits of enduring compounders:
Effective capital allocation and asset-light, high-return business models.
These are the hidden engines behind companies that grow earnings consistently and compound shareholder value over decades.
Capital allocation is how management decides to use the company’s cash — reinvesting in the business, buying back shares, paying dividends, or acquiring other companies.
Done well, it creates long-term value. Done poorly, it destroys it.
Great allocators are disciplined. They invest where returns are high and avoid empire-building or chasing revenue growth at the expense of returns.
AutoZone has compounded EPS at ~20% annually for two decades. Not by expanding margins or acquiring rivals, but by:
The company’s legendary buyback program — from 135 million shares to just 17.8million — has helped drive a 453x increase in EPS over time.
Capital allocation doesn’t get more shareholder-aligned than this. Here is an excellent visual from Quartr that says it all:
GE once symbolized American industrial dominance. But decades of aggressive, unfocused M&A turned it into a sprawling conglomerate with no clear identity.
From financial services to entertainment to energy, GE chased growth across sectors often overpaying and underdelivering. Many acquisitions failed to generate meaningful returns, and layers of complexity masked deteriorating fundamentals.
The result?
Mounting debt, poor returns on capital, and over $500 billion in lost shareholder value since its peak.
GE reminds us that growth alone isn’t the goal – smart reinvestment is. Without it, even iconic companies can unravel.
A 24-year visual of GE’s return on equity tells the story of unchecked expansion, write-downs, and a hard reset. From 27% ROE to -43%, the chart reflects how poor capital allocation can erode even the strongest franchises.
Visa is a textbook example of an asset-light compounder:
It doesn’t lend money or take on credit risk — it simply facilitates transactions.
It has no physical branches, and minimal capex requirements.
Capex-to-sales remains under 5%, while ROIC exceeds 40% — an elite figure few businesses can sustain.
Its business model benefits from powerful network effects: the more consumers and merchants use Visa, the stronger and more defensible the network becomes, without needing major incremental investment.
Rather than pouring cash back into physical infrastructure, Visa returns capital to shareholders through buybacks, enabled by durable free cash flow and operational leverage.
This capital efficiency is reflected in Visa’s rising ROIC over time — despite a brief dip from a one-off litigation charge in 2012.
General Motors is a classic example of an asset-heavy business:
Despite periods of strong performance (like 2013), GM’s long-term ROIC profile shows how hard it is to sustain returns in capital-heavy industries.
This inefficiency is evident in GM’s volatile, low-return history, a stark contrast to the durable returns of asset-light models like Visa.
When evaluating businesses, here are 3 questions to ask:
1. Favor companies that earn more per dollar invested.
2. Beware of capital-hungry models with low returns.
3. Track ROIC trends over multiple years.
To see how companies like AutoZone and Visa stack up on capital efficiency — and how it factors into our quality scoring, visit www.compounding-academy.com
In the next issue: We’ll dive into Free Cash Flow Machines and Financial Strength — why cash generation and a robust balance sheet are essential ingredients for long-term compounders.