Day 955 — The Pizza Paradox
Subtitle: Lab Notes: Phil Town's Big Five, a Balance Sheet Below Zero, and What the Numbers Won't Tell You
There’s a particular kind of investor self-deception I want to talk about today, because I’ve practised it myself and I suspect you have too.
It goes like this. You read a value-investing book — say Phil Town’s Rule #1 — and come away with a tidy checklist. Five growth rates. Four “M”s. A formula for intrinsic value. It feels like a recipe: plug in the numbers, turn the crank, out comes a verdict. The promise is that judgement can be outsourced to arithmetic.
It can’t. But the arithmetic is still worth understanding deeply, because the point of the numbers isn’t to hand you an answer — it’s to force the right questions about a business. And once you understand what each one measures, you find the framework doesn’t only work for listed shares. It works just as well when you’re standing in a café you’re thinking of buying, or any bricks-and-mortar business where someone wants real money for a real cash flow.
So today: what the “Big Five” growth rates are actually telling you, how debt fits in (Town is oddly quiet on the most dangerous and most powerful lever in the picture), and how the numbers connect back to the Four Ms — the qualitative side that stops the arithmetic from lying to you.
I’ll use a worked example whose numbers come out as a glorious mixed bag — because a company that passes every test cleanly teaches you nothing about what a failing number looks like, or how to tell a real red flag from a misread one. The company is Domino’s Pizza (NASDAQ: DPZ): a brand you know in your bones, and a business far stranger under the bonnet than the pizza box suggests.
The usual warning: I hold no position in Domino’s, none of this is advice, and the piece is about method, not whether you should buy the stock. Big Five figures are ten-year measures from my own screen, cross-checked against the public record; valuation figures are as of writing. I may have got something wrong; if I have, I’ll own it.
The Big Five, briefly
Town’s system rests on five numbers, each a compound annual growth rate (CAGR) measured over ten years, then five, then one — so you can see whether the business is accelerating or fading. The five:
ROIC — return on invested capital
Sales (revenue) growth
EPS (earnings per share) growth
Equity / book-value-per-share growth
Free cash flow growth
The rule is brutally simple: he wants each compounding at 10%+ a year, consistently, over a decade. Consistency matters as much as the level — a business that grew 40%, 2%, 30%, then -5% is telling you something very different from one that ground out 12% every year, even if the averages match.
Here’s what most summaries skip: each number answers a different question, and they only mean something together. One at a time, then — because the why is where the understanding lives.
ROIC — “Is this actually a good business?”
Return on invested capital is, to my mind, the single most important number Town asks for — and the one people most often skip, because it’s the fiddliest to calculate. For every dollar of capital tied up in the business — equity and debt — how many cents of profit does it throw off each year?
A business earning 20% on invested capital is a machine that can turn capital into more capital, again and again. One earning 4% is barely beating the bank. ROIC is the closest thing in finance to a measure of quality: it tells you whether the company has something special — a brand, a network, a cost advantage — or is just shovelling capital around for thin margins. Why ten years? Because one good year is luck. A decade of high ROIC is a moat you can see from orbit.
Sales growth — “Is the world buying more of this?”
Revenue growth is the rawest signal of demand. It sits at the top of the income statement, before all the accounting choices that muddy everything below it. If sales aren’t growing, nothing else can grow for long without financial engineering. It’s the least manipulable of the five and, for that reason, the one I trust first.
