Capital allocation is one of the biggest factors that determine an investor’s success and a company’s future. Even great businesses can fail if money is allocated poorly.
1. Why Capital Allocation Matters
The impact of earning 200% on ₹10,000 is small, but earning the same 200% on ₹20–50 lakh can change your life. Allocation decides outcomes.
2. How Companies Allocate Capital
• Dividends • Buybacks • R&D and marketing • Acquisitions or mergers • Capex • Debt repayment
3. Risks of Poor Allocation
Buying unrelated businesses, doing capex at the top of a cycle, or buying back shares at peak prices can destroy shareholder value.
4. When Not to Give Dividends
If growth opportunities are strong, the company should reinvest instead of distributing dividends.
Great CEOs protect capital and ensure it earns maximum returns. Evaluating a company’s allocation skill is essential before investing.