So I started going through Valuation: Measuring and Managing the Value of Companies. The equation (which is just a variation of DCF):
Value = (Invested Capital x ROIC x (1 - g / ROIC) ) / (WACC - g)
where g is the perpetual rate of growth and WACC is the weighted average cost of capital.Note, this is all based on the assumption that the cash flows growth a constant rate perpetually from here to eternity so the model should be on the high side of true value. This also assumes ROIC is contant (e.g. newly invested capital gets the same rate of return as previously invested capital.) You can modify it to factor in RONIC (return on incremental capital):
Value = (Invested Capital x ROIC x (1 - g / RONIC) ) / (WACC - g)
One interesting point the authors make:
In general, companies already earning a high ROIC can generate more additional value by increasing their rate of growth, rather than their ROIC, while low-ROIC companies will generate relatively more value by focusing on increasing their ROIC.
So I'm wondering, Jae, if that might be something to try for your increasing CROIC screen (e.g. restricting it to lower CROIC companies or something.)
You can also play with the formula a bit since (Invested Capital x ROIC) ~ Earnings, you can use it to derive an earnings multiple:
P/E = (1 - g / ROIC) / (WACC - g)
An example the authors use of a typical large company in the US with ROIC = 13%, growth rate = 5% and discount rate = 9% gives a P/E = 15.4.
And in the case where (ROIC < WACC), the formula correctly shows that growth actually destroys value (which also happens to be a criteria that gets James Chanos interested in a short candidate.)
Post edited by Unknown User at -0001-11-30 00:00:00
โพสต์
บันทึกไม่สำเร็จ