An analysis of the bearing and deformation mechanism of a composite foundation reinforced with geogrid-encased stone columns is presented in order to obtain its bearing characteristic and settlement calculation method. The composite foundation is divided into three parts: the reinforced section, the unreinforced section, and the underlying stratum. Based on the Hooke’s law of space problem and layer summation method, the settlement of the reinforced section is calculated with the layered iteration method in view of the relative slip displacement between the pile and soil of the reinforced section without a plastic zone. The compatibility of vertical and radial deformation of the unreinforced section is analyzed based on the pile-soil element model. The settlement of the underlying stratum is calculated by the layer summation method. Therefore, the calculation formula can be derived for a composite foundation reinforced with geogrid-encased stone columns. The results of engineering examples show that the settlement result obtained from this method is close to the measured one. Furthermore, the method is more feasible and can be applied in engineering practice, whereas the results calculated with other available methods are more dangerous.