Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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Elite Holding Companies earn premium valuations through long-term cash flow compounding. Take the software behemoth Constellation Software (CSU). Between 2005 and 2025, CSU grew operating cash flow 111-fold: a CAGR of 26%. Or Lagercrantz, CSU’s industrial cousin from Sweden. A 17x increase in cash flow over a 20-year period, which translates into a 15% CAGR. Share price has duly followed, from SEK 3 in 2006 to 230+ today:

In both cases, cash flow growth has significantly outpaced revenue growth. Two factors contributed here. 

One, CSU and Lagercrantz have managed to scale deployment of capital without compromising return on capital. In other words, they consistently excel at finding moderately priced businesses with deep moats: long runways and strong pricing power. 

Two, converting those moats into hard cash. 80-90% of Lagercrantz’s accounting EBITA drops down to operating cash flow. 

Let's double click on this. 

Lagercrantz traces its lineage to Bergman & Beving, Sweden’s OG compounder. Along with Addtech, Momentum Group et al it is known for obsessively tracking P/NWC: the ratio of EBITA to Net Working Capital. Below 25% is terrible. Above 45% is excellent. 

Further reading: EBITA / Net Working Capital: the magic formula from a Swedish HoldCo clan

This should be straightforward - but it really isn't. 

Two months ago, we published a tear-down of Volati, noting the otherworldly metrics of Ettiketto, a label printing rollup and its top-performing division. For what it’s worth, Ettiketto’s P/NWC is above 160%. Great - but is this over-the-top excellent or not comparable? An eagle-eyed reader wrote back, alerting us to the fact that Lagercrantz had recently upgraded its P/NWC target from 45% to 60%. Better still, Lagercrantz’s actual ratio has been running around 80% for some time! 

How on earth is this possible? What is this Working Capital Arms Race - and how come Lagercrantz (and Addtech) have been leading by such a wide margin? After weeks of research, here is our take, broken down into 3 chapters. Caution: it’s TECHNICAL 🗜️  

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Quality compounders tend to over-index on 3 industries: Value-add Distribution, 

Manufacturing, and Vertical Market Software. For the purposes of this analysis, we excluded VMS HoldCos, which tend to carry negative NWC (due to annual licenses / prepayments). 

Further reading: Working capital: the software M&A tripwire. 

Among “traditional industry” HoldCos, the composition of revenue streams drives the differences in both profit margins and net working capital efficiency:

On the left hand side, we have distribution-centric compounders like Lifco, Diploma and Röko. Take Renovotec, one of Röko’s largest businesses (c.9% of Group revenue). It’s a UK-based supplier of “rugged hardware” (barcode scanners, tablets, RFID sensors etc.) to customers across the logistics, retail, manufacturing and healthcare industries. In 2025, Renovotec reported a 17% EBITDA margin (source: UK Companies House). Hardware resale represents only 2/3 of revenue, with the remainder coming from maintenance and rental contracts.  

Further reading: Is Sweden’s Röko the top-flight compounder it strives to be - or a growth equity shop in disguise? Cash flow insights from 24 portfolio companies over 10 years

In the middle, you find product-centric HoldCos like Halma and Lagercrantz. They cannot escape working capital. They carry raw materials, WIP, and finished goods.  

And on the right, there’s Bergman & Beving: an aggregator in transition. After pulling the plug on a centralisation experiment and several divestments, B&B is actively phasing out lower-margin trading in favour of proprietary products. In doing so, B&B is trying to catch up to Lagercrantz (which, in turn, is catching up to Halma) and to Addtech, both of which it spun out at the turn of the millennium. 

Since 2020, all 3 companies have considerably improved their capital efficiency:

The different paths chosen by these compounders raise an obvious question though:   

P/NWC is an intuitive metric that’s easy to grasp and to translate into day-to-day decisions. How much stock shall we carry? How many days do we give customers to pay? How much operating cash shall we keep on hand? 

Take a look at the balance sheet of Bergman & Beving. There’s little in the way of tangible assets beyond working capital: 

But how relevant is P/NWC for product-centric HoldCos that should have capex? 

The answer is, it depends on the operating model. As the Bergman & Beving CEO put it, “We prefer product companies with patents or proprietary IP that typically outsource production, making them asset-light”. 

Who doesn't love an IP-rich business with a contract manufacturer in the background! Alas, this model doesn't work in e.g. asset-heavy industries like injection moulding or door / window manufacturing.  

Further reading: The Rollup of Tomorrow Vol 7. Uncomplicated Group: Walk away from a corporate career to build an Injection Moulding Empire

Also, what about add-on acquisitions as substitutes for organic investment into sales or production capacity? 

Arguably Return On Invested Capital (ROIC, after-tax) or Return on Capital Employed (ROCE, pre-tax) are more holistic measures, for they capture all of invested capital - whether cash paid for machinery or for acquisitions. Now, I'm sure analysts love the universality of ROIC / ROCE, but how helpful is it for management teams that have no discretion over M&A or large-ticket capex?

One workaround is to report ROCE with and without goodwill, the way Volati does it:

Can you spot the tremendous variance within the group? Ettiketto is an asset-light label printing business with a tiny working capital footprint. Nor does it carry meaningful fixed assets. On the other hand, Salix Group, which was recently spun out, carries meaningful working capital owing to its mainstay of supplying the Nordic construction industry.  

Yes, it’s all about cash flow generation, but unless you understand how that cash flow is generated, you’re prone to compare apples to oranges. Which brings us to the third, and final topic: