The “growth cycle” is an explanation of the “engine” behind the process by which good quality companies can grow in value for many years and reward its investors for their ownership.

1.) A brand new company begins with its capital or money. This is, of course, its only asset. And, when it first starts up, that money represents the equity or value of the company.

2.) Those funds are used to purchase the machines or equipment required to produce the products or services. It also buys everything necessary to begin operating, from raw materials to paper clips. So the money spent for these new assets represents only a change in the kinds of assets.

3.) Now the company begins to produce its products or services and, when those are sold, they bring in the revenues or sales.

4.) From those revenues, the expenses—salaries, materials, etc.—are paid.

5.) The profit that is left after the expenses have been paid is added to the equity of the company and the company’s value is increased by that amount.

6.) Most of that money, especially for growing companies early in their life cycles, is then used to purchase still more assets, more raw materials, more machinery, which generate more jobs.

7.) These additional assets generate more revenue, and the cycle continues, repeating itself over and over.

With each cycle, the company’s equity, and the value to its shareholders increases. And, until the company becomes so large and successful that it can no longer produce more money by re-investing in its own operation, it continues to do so. Once a company has grown past that point, assuming it learns to cope with maturity and can stabilize and be profitable, it then commences to reward its owners—its shareholders—with a portion of its income in the form of dividends. And the company, no longer a growth company, becomes one of those blue ribbon companies in which people invest for the income.