Learn how to value high-quality companies like Costco using justified P/E ratios. Explore two methods based on ROIC and competitive advantage periods to understand premium valuations.
Super interesting frameworks, well explained. I have one company with ROIC above 70% and justifying the valuation is always a challenge. Definitely will try those approaches.
Gordon Growth Model is for infinity time period.
It is impractical to be applied in stock investment.
The Buffett-Munger Profitability Investing Truism Dharma 150:
Justified Discounted Growth Formula for n-year
The Gordon Growth Formula is valid with 2 prerequisite conditions:
i.
The time frame is ∞ years.
ii.
The g (growth) is less than r (discount).
iii.
That means, for a stock with g > r, or with a finite N year, Gordon Growth Formula will be rendered invalid.
iv.
Investment for an infinite number of years is logically ill, not realistic.
v.
Correction:
Justified Discounted Growth Formula for n-year
= D₀ × F × ( 1 - Fⁿ) / (1 - F)
where
D₀
= Dividend TTM
D₁
= The First Discounted Dividend of forward 12 months
= D₀ × F
F
= (1+g) / (1+r)
g
= dividend growth ratio
r
= discount ratio
n
= number of years
Super interesting frameworks, well explained. I have one company with ROIC above 70% and justifying the valuation is always a challenge. Definitely will try those approaches.
Thank you. Yeah, they’re just another tool in the valuation/pricing tool box.
True. I found it’s a decent exercise for mature, stable capital structure, companies expected to grow earnings sub 10%.