When people talk about capital, they tend to mean stuff: factories, patents, cash, code. Things you can count, stick in a spreadsheet, and list on a balance sheet. But that misses the point.
The real magic of capital isn’t in the owning. It’s in the doing.
Hernando de Soto, the Peruvian economist and author, put it brilliantly in The Mystery of Capital, describing capital as economic potential energy. He showed how underutilized assets, especially in developing economies, can become powerful engines of growth once they’re legally recognized and put to work. His insights apply just as well to the corporate world.
A company can exhibit all the signs of wealth — towering HQs, shiny new factories, bulging warehouses, a patent portfolio thick as a phone book — and still be going nowhere. Idle or misused, assets aren’t an advantage. They’re dead weight.
That’s the real distinction, and it’s easy to miss. Capital isn’t what sits on the books. It’s what gets put to work. A machine only counts when it’s part of a process. Intellectual property means nothing until it earns a dollar. Land has no power until it’s built on, rented out, or borrowed against. Even the strongest balance sheet is just a static display unless it’s being used to create value.
Capital is a latent force. Its real worth lies with people who know how to unlock it — by moving it, combining it, and setting it in motion.
Put a lawyer behind the controls of a 100-tonne excavator and not much gets done. Give it to a seasoned operator and you move mountains. It’s not the machine that matters, it’s who knows how to use it.
This is where leadership earns its keep. It takes more than accountants to turn assets into value. You need strategy, clear thinking, and the nerve to act. You need people who know when to push, when to pivot, and when to press “go.” Because value doesn’t leak out of the asset register on its own. It shows up only when capital is actively directed and integrated into a broader, moving system.
Two businesses can look identical on paper — same assets, same book values — but the one that’s better at putting its capital to work will be worth ten times more. Why? Because the engine isn’t just built, it’s running.
That’s the real mystery of capital. It’s not what you hold. It’s what you do with it.
Smart investors get this. They’re not just looking for big asset bases. They’re watching for signs that those assets are pulling their weight.
Asset turnover tells you a lot. A high number means the company isn’t just sitting on stuff — it’s using it. Products are moving, inventory’s flowing, machines are humming.
Then there’s return on invested capital (ROIC), which is the real litmus test. How much bang are you getting for every buck tied up in the business? If ROIC is high, it’s a signal that capital is being deployed with purpose. It says the business knows what it owns and isn’t wasting time or money trying to squeeze value from the wrong things.
On the flip side, recurring asset writedowns are a red flag. They suggest capital went to the wrong place or sat still too long. Once or twice might be bad luck. A pattern is something else entirely — usually a sign that management lacks any talent in terms of effective capital allocation.
Smart capital allocators don’t fall in love with assets. They shift resources quickly, try new things, and walk away when the economics don’t stack up. If something’s not working, they shut it down. If it clicks, they double down.
They’re not empire builders. They’re focused. They own only what they need to control the value they’re creating. Everything else, they borrow, rent, or partner for. That’s how you turn limited resources into something much bigger.
Because at the end of the day, capital is just potential. Unused, it’s nothing. Directed well, it becomes something far more valuable.
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