December 5, 2025
A few days ago, while interviewing candidates for the role of research analyst at Equitymaster, I met a young man who proudly introduced himself as a “deep value investor.”
He said it with conviction, almost as if someone was revealing a personal philosophy rather than a professional preference.
His approach was simple: don’t project, don’t speculate, don’t model. Just look for companies that are trading well below their value. In his words, he only wanted to buy a Rs 10 coin for Rs 5.
It’s a strategy that many legends have used with tremendous success. If it is followed with discipline, it has worked.
But as we talked, something kept bothering me. Not because he was wrong, but because the idea of ”value” he was working with felt incomplete.
To show him what I meant, I asked a very simple question.
Imagine two companies. One we call Value Ltd. The other, Growth Ltd. Value Ltd, trades at a modest price-to-earnings ratio of seven times earnings and is expected to grow at 3 percent per year.
Growth Ltd trades at a seemingly expensive price-to-earnings ratio of 30, but earnings are growing at a robust 25 percent.
“Which one is cheaper?” I asked.
Which one is cheaper?
| Value Ltd | Growth Ltd | |
|---|---|---|
| Projected revenue CAGR | 3.0% | 25.0% |
| Current PE | 7X | 30X |
“Value Ltd, of course.” He was not prepared to give much weight to growth because, in his view, it was in the realm of speculation.
As analysts, our job is to find candidates where projections don’t feel like speculation, but are backed by business reality, growing moats, optional capabilities and competent management.
When you project these two companies three years ahead – even with conservative assumptions – the picture flips in an unexpected way.
If Value Ltd continues to trade at its low price, it will barely give you an annualized return of 3 percent. Growth Ltd, even after halving its high price-to-earnings ratio to take into account slower future growth, is delivering a better result.
| Value Ltd | Growth Ltd | |
|---|---|---|
| Stock price today | 100.0 | 100.0 |
| PE Today | 7.0 | 25.0 |
| Earnings per share in the past 12 months (EPS, year 0) | 14.3 | 4.0 |
| Expected growth CAGR of earnings | 3.0% | 25.0% |
| EPS year 1 | 14.7 | 5.0 |
| EPS year 2 | 15.2 | 6.3 |
| EPS year 3 | 15.6 | 7.8 |
| PE in three years | 7.0 | 15.0 |
| Share price in three years | 109.3 | 117.2 |
| Upward in 3 years | 9.3% | 17.2% |
| CAGR returns over 3 years | 3.0% | 5.4% |
The true value of a company lies somewhere deeper: what it can earn sustainably in the future.
And that’s where most people, including many self-proclaimed value investors, unknowingly miss the plot.
And then there is another important aspect.
Not all growth is equal.
A company may show strong earnings growth, but if it has to keep injecting new capital to achieve that growth, it may not be creating value at all.
On the other hand, a company that earns really high returns on invested capital – think metrics like ROCE and ROE – tells you something powerful. It tells you that the company is not only profitable; it is efficient, competitive and possibly protected by some kind of moat.
But here’s the twist. Even high returns do not guarantee wealth creation if the company cannot reinvest the money earned anywhere.
Think of mature industries such as lubricants. These companies store cash. They earn great returns. They almost never stumble. And yet they can’t scale. The industry is not expanding.
The demand is predictable. Growth opportunities are scarce. They have what you might call a ‘legacy moat’: a comfortable profit pool, but no river leading to something bigger. So they return most of the money to shareholders instead of reinvesting it.
Safe? Yes.
Trustworthy? Yes.
But compounding machines? Not quite.
Now imagine a different kind of business. A company that not only achieves a high return on capital, but also has multiple places to reinvest its profits.at the same high return. This ability to redeploy capital over and over again is what I call one reinvestment moat.
This is the real driver of wealth creation.
These companies don’t just look good today, they almost have to look better tomorrow. They not only provide income, but also opportunities.
And this is where the old debate between value and growth fails completely. For such companies today, a seemingly high price-to-earnings ratio could be one of the biggest bargains you can find. The market may describe the stock as expensive; business economics may quietly scream the opposite.
That’s why I’m always cautious when someone says, “I don’t like this stock because it looks expensive.” Expensive compared to what? On last year’s income? To sector averages? Or what the company could become if it continues to build capital at high rates of return over the next decade?
There is a difference between buying something expensive and buying something valuable. And price alone doesn’t reveal value. Growth alone does not reveal value. Even returns alone don’t reveal value.
It is the interplay of all three that tells the real story.
And for me that is what investing is all about: finding growth at a reasonable priceunderstanding the quality of that growth, and identifying companies where reinvestment potential and returns work together like cogs in a well-oiled machine.
These are the companies that turn investors’ patience into wealth. They take today’s income and build tomorrow’s possibilities. They don’t just pay dividends; they create value.
Have fun investing.
Kind regards,
Richa Agarwal
Editor and research analyst, Hidden gem
Quantum Information Services Private Limited (Research Analyst)
Richa Agarwal (Research Analyst), Managing Editor, Hidden Treasure has over 7 years of experience as an equity research analyst. She routinely scours the small-cap universe for fundamentally strong companies trading at attractive prices. Having degrees in both finance and engineering has served her well in analyzing business models in the small cap space.
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