Professor, In the invested capital column do you net out depreciation ? Also how do you come up w/ sales-to-capital ratios (i have seen you use larger numbers for companies like Amazon) for a company with a very new business model vs incumbents. In this case by using industry averages it implies it is as efficient in turning over capital into sales as any other company in the industry.
I do believe that historical growth can be useful, in the case where the company's growth is low enough to be long term sustainable (generally mature companies in mature industries), provided that overall analysis shows that there is nothing to indicate that will change. In measuring historical growth, I use logarithmic curve fitting to 5+ recent years of the relevant cash flows. This counters the impact of the first or last year being an anomaly.
Hi, i was wondering if i can use the percentage change in equity for the retention ratio, as it can be varied not just by net income .? Anyways , your content is so logical and intuitive.Thanks!
Buybacks, which cause a change in equity, are often paid for by taking debt of an equal size (to change D/E ratio) so it might not be able to tell you about the income that is retained and reinvested in the business.
I am confused, so we are deriving growth % by estimating % reinvested? If yes, why cant we just estimate revenues then assign reinvestment amount as % of revenues to achieve our estimated revenue growth?
Thankyou So much Sir.. Can anyone just share the valuation they did for any company following the approach and rationale delivered by Sir in these videos? It would really help me in cross checking my work.. and would help me resolve my mistakes as well..
Would someone mind explaining to me how those operating margins were estimated each year?Besides having a target margin, on what basis does one estimate them for the years in-between? Thank you
Once you have a target, just slowly build up to it, taking an equal increase each year. It won't affect your valuation that much, so no need to be very precise
Hi Professor, hope all is well. These videos are great! I am just wondering, what should I do when when g = b * ROE is negative. The company pays out more dividend than it earns? Any insight of how else I could better determine its terminal growth? Thanks!
I think the terminal growth can be (and not so rarely is assumed to be) negative, in fact. What it cannot be is to be higher than the discount rate, otherwise the NPV equals ∞. However, I believe the formula *g = b × ROE* can't be interpreted the way it often is, both in this lecture and elsewhere (see, for example, American Society of Appraisers Business Valuation Committee. Special Topics Paper #2. Reinvestment considerations in terminal value estimates: capital expenditures and depreciation levels that result in appropriate reinvestment rates. _Business Valuation Review_ . 2016;35(4):114-9.) Provided ROE (=RRR=discount rate) is constant, when the *reinvestment rate = growth rate / RRR* , it basically means that growth due to reinvestment is neither accretive, nor dilutive; thus totally useless for an investor. This is because, if one takes the classic perpetuity equation *NPV=periodic cashflow / (RRR − growth rate)* and the formula above and express *cashflow=earnings × (1 − reinvestment rate)* , then substitute for *reinvestment rate=growth rate/RRR* , one eventually gets *NPV=(earnings × (1 − growth rate/RRR))/(RRR − growth rate)=(earnings × ((RRR − growth rate)/RRR))/(RRR − growth rate)=earnings/RRR* . So we see that, if the growth rate and reinvestment rate relate to each other as suggested in that formula, NPV doesn't change from the scenario when we reinvest nothing and don't grow at all. Therefore this formula is useful not to predict whether our reinvestment is enough to ensure the target growth, but to assess whether our reinvestment is accretive, meaningless, or even dilutive from the investor's perspective. Regarding your nice paradox, it follows that you cannot retain the same NPV (as when you don't reinvest and don't grow) when the growth turns negative... unless you distribute as dividends more than FCFE, which is apparently not sustainable in perpetuity.
If g = retention rate x roe is negative, then adjust it to assume a normal period of payout say 50%. The guy above this commend talked a lot but basically don’t use RR x ROE if the payout ratio is super high, because that company cannot do that forever otherwise they’d go out of business, so adjust it to assume in the future they have an RR of something similar to the average of their peers
If a company is regularly paying more dividends than it earns then I don't think it is worth investing in and if you want to value it I think a dividend discount model will be better than FCFF or FCFE
@Jay Zeus ROC t+1= NOPAT t+1 / IC t seems to satisfy all years except 9 and 10. I'm puzzled as well about the decline of ROC in the last two years because while revenue growth rate declines thus decreasing reinvestment, operating margin keeps improving which is supposed to increase ROC. Hope this helps.
it is taken into account in the discount rate (higher beta from d/e ratio) and lower net income from increased interest expense. potentially some other places too
Slides: people.stern.nyu.edu/adamodar/pdfiles/ovhds/dam2ed/growthandtermvalue.pdf
Paper: people.stern.nyu.edu/adamodar/pdfiles/papers/growthorigins.pdf
Thank you so much.
thanks a lot
Best youtube channel ever!
Professor, In the invested capital column do you net out depreciation ? Also how do you come up w/ sales-to-capital ratios (i have seen you use larger numbers for companies like Amazon) for a company with a very new business model vs incumbents. In this case by using industry averages it implies it is as efficient in turning over capital into sales as any other company in the industry.
I do believe that historical growth can be useful, in the case where the company's growth is low enough to be long term sustainable (generally mature companies in mature industries), provided that overall analysis shows that there is nothing to indicate that will change. In measuring historical growth, I use logarithmic curve fitting to 5+ recent years of the relevant cash flows. This counters the impact of the first or last year being an anomaly.
This is gold!
Can we use same growth rate for revenue forecasts also?
Hi, i was wondering if i can use the percentage change in equity for the retention ratio, as it can be varied not just by net income .?
Anyways , your content is so logical and intuitive.Thanks!
Buybacks, which cause a change in equity, are often paid for by taking debt of an equal size (to change D/E ratio) so it might not be able to tell you about the income that is retained and reinvested in the business.
Sir, can you please explain why you have taken the change in Revenue rather than just revenue?
I wish I had lecturer like him.
I am confused, so we are deriving growth % by estimating % reinvested? If yes, why cant we just estimate revenues then assign reinvestment amount as % of revenues to achieve our estimated revenue growth?
Thankyou So much Sir..
Can anyone just share the valuation they did for any company following the approach and rationale delivered by Sir in these videos?
It would really help me in cross checking my work.. and would help me resolve my mistakes as well..
Hi what happens if the OC is negative? e.g. if we use Sirius and assume it has only existed for the first for years
Would someone mind explaining to me how those operating margins were estimated each year?Besides having a target margin, on what basis does one estimate them for the years in-between? Thank you
Once you have a target, just slowly build up to it, taking an equal increase each year. It won't affect your valuation that much, so no need to be very precise
Aditya Bhattacharyya ah I see. Thank you!
But, what happen if the companie dont have a retention ratio ? Growth is Cero ?
thankyou
Any one please enlighten me the 3% and 300% at 14:30 ? what was he talking about? reinvest less and more
Hi Professor, hope all is well. These videos are great!
I am just wondering, what should I do when when g = b * ROE is negative. The company pays out more dividend than it earns? Any insight of how else I could better determine its terminal growth? Thanks!
I think the terminal growth can be (and not so rarely is assumed to be) negative, in fact. What it cannot be is to be higher than the discount rate, otherwise the NPV equals ∞. However, I believe the formula *g = b × ROE* can't be interpreted the way it often is, both in this lecture and elsewhere (see, for example, American Society of Appraisers Business Valuation Committee. Special Topics Paper #2. Reinvestment considerations in terminal value estimates: capital expenditures and depreciation levels that result in appropriate reinvestment rates. _Business Valuation Review_ . 2016;35(4):114-9.) Provided ROE (=RRR=discount rate) is constant, when the *reinvestment rate = growth rate / RRR* , it basically means that growth due to reinvestment is neither accretive, nor dilutive; thus totally useless for an investor. This is because, if one takes the classic perpetuity equation *NPV=periodic cashflow / (RRR − growth rate)* and the formula above and express *cashflow=earnings × (1 − reinvestment rate)* , then substitute for *reinvestment rate=growth rate/RRR* , one eventually gets *NPV=(earnings × (1 − growth rate/RRR))/(RRR − growth rate)=(earnings × ((RRR − growth rate)/RRR))/(RRR − growth rate)=earnings/RRR* . So we see that, if the growth rate and reinvestment rate relate to each other as suggested in that formula, NPV doesn't change from the scenario when we reinvest nothing and don't grow at all. Therefore this formula is useful not to predict whether our reinvestment is enough to ensure the target growth, but to assess whether our reinvestment is accretive, meaningless, or even dilutive from the investor's perspective.
Regarding your nice paradox, it follows that you cannot retain the same NPV (as when you don't reinvest and don't grow) when the growth turns negative... unless you distribute as dividends more than FCFE, which is apparently not sustainable in perpetuity.
If g = retention rate x roe is negative, then adjust it to assume a normal period of payout say 50%.
The guy above this commend talked a lot but basically don’t use RR x ROE if the payout ratio is super high, because that company cannot do that forever otherwise they’d go out of business, so adjust it to assume in the future they have an RR of something similar to the average of their peers
If a company is regularly paying more dividends than it earns then I don't think it is worth investing in and if you want to value it I think a dividend discount model will be better than FCFF or FCFE
Notes : time 5:56, 7:31, 9:42, 11:03
Estimating growth of one of the major US Airline operators Post-COVID is a Sisyphean task
someone have the spanish traduction?
sir ROE of a company could be increased with higher Debt so should we
also take that into account ?
in case of high leverage i think you can use reinvestment rate and return on capital where debt will be accounted for
@@MrAhmt05 but i am calculating for net income?
@@divyanshunarang4280 you know roe and cash flow into equity are different things right?
@Jay Zeus ROC t+1= NOPAT t+1 / IC t seems to satisfy all years except 9 and 10. I'm puzzled as well about the decline of ROC in the last two years because while revenue growth rate declines thus decreasing reinvestment, operating margin keeps improving which is supposed to increase ROC. Hope this helps.
it is taken into account in the discount rate (higher beta from d/e ratio) and lower net income from increased interest expense. potentially some other places too
Note: 6:43
Yes master 👁👄👁
whats with the comments of “yes master” on aswath damodaran? xd