After showing basic framework in of Valuations in Post 6, Post 7, Post 8 & Post 9 we go to the final post where we will see the scenario when there is a real/significant jump in Valuation Multiples of a business.
So as you can see P/E is rising from the combination of Return (ROIC) over WACC and Reinvestment rate (Growth).
So the main thing to see here is that a single factor won’t increase/ drive valuation of the company. It must be a combination of both Growth & Returns (ROIC > WACC) that will drive Valuation.
One of the biggest assumptions that we have kept here is regarding a company’s continuous generation of ROIC of 30% till infinity and a Opportunity size where the company can keep on re-investing 45% of the NOPAT forever.
Below is a summary table in which we have summarized when Reinvestment will create value for a company.
The assumptions of perpetually high ROICs & never ending opportunity size are not applicable in the real world, in fact determining
1. Competitive Advantage Period (CAP, also called as MOAT) which is defined as the period till which a company will be able to generate ROIC > WACC and
2. Growth Advantage period (GAP) which is defined as the period where the company can have high-reinvestment rates bringing above average growth rates for the company.
Are the most significant aspects of Valuation & business Analysis.
For detailed understanding of CAP and GAP read
Our summary of Motilal Oswal Wealth Creation study of CAP and GAP
Our Summary of Michael Maubossin research Paper on MOAT
Our Porter Analysis Series
Our MOAT Analysis Series
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