Microsoft MSFT will serve as a fine example since you know the history of the company and what it does. In respect to no. Applying this idea to Microsoft, the first step is to adjust the balance sheet. We are trying to get to a figure that a competitor will have to realistically pay up in order to enter the market. Step two.

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Since the rise of the internet, anyone with access to a computer, and now a mobile phone, can blog or vlog just about anything. Globally, this has given rise to a number of people teaching others how to invest in the share market. Before the internet; newspaper editors, radio producers, book publishers and TV producers were the gateway, which held back or promoted people, who wanted to teach investing to the general public.

The internet blew off the doors to this gateway, creating in effect, a large market place of ideas in the internet sphere. This market place of ideas is also useful in filtering out those who know what they are talking about compared to those who think they do. In the market place of ideas; no idea or mental model, is off-limits, nor should they be. Every idea, we as Bloggers and Vloggers place out in this market place, is and should be, subject to critique.

Especially, considering that the advice we are providing could result in severe consequences for the person listening and acting upon our advice. And, one idea used in practice by value investors, that we need to critique, is the Earnings Power Value concept.

In this article, we will look at why parts of the equation need changing, and in doing so, how it would better suit your needs. Whereas, the Discounted Future Cash Flow DFC formula relies solely on estimating future cash flows, which incorporates our own research and bias about the ability of the company to produce future cash flows.

And, if the company has no competitive advantages, which allow the company to grow revenues and earn high rates of returns on capital, then you are wasting your time and increasing the risk of losing money. What I mean by this is that the cost of capital is an important concept to understand, but implementing it in to practice causes more troubles than what it is worth.

And, the cost of debt to the business owner is the interest rate on debt demanded by the lender, be it a bank or corporate bondholder. We can safely ignore the interest rate a company pays on its debt pile in this case, because we already account for it in process of evaluating the asset and liability values on the balance sheet, which is step three in the Share Investors Blueprint.

And, because we are looking to invest in the highest quality businesses that earn high rates of return on capital, then these businesses will have little to no debt.

Because the cost of equity to the business owner is the rate of return we demand as investors, then it makes sense to apply our required rate of return, which is the same rate of return we want our investments to compound at! When a business manager approaches me for funds for a project, I simply charge them 15 percent — that usually gets their attention. If we demand at a minimum 10 percent, then the EPV formula becomes…. You know with certainty that you are earning a 10 percent yield on your investments if you buy shares at the EPV per share, and if the share price fall below EPV per share figure than the yield you earn increases!

Which also applies to the dividend yield. The ERP is the markets, as a whole, required rate of return discount rate , I question whether how applicable to us individual investors, who are selecting stocks on an individual basis, the ERP is?

The method Greenwald uses to calculate the Adjusted Net Earnings figure, is really insightful and I encourage you to apply it. I am not advocating that you switch, but consider using it, especially as an alternative when doing a back of the envelope calculation. But, as CSL operates with strong competitive advantages, allowing it to earn high rates of returns on capital and grow revenues at 7.

Over the next 6 months, the market responded to the undervaluation, rewarding shareholders with a 64 percent return!

The EPV is 29 per cent above the share price, which is the perfect time to buy. You get the current earnings at a discount, significantly reducing the risk of loss, and you pay nothing for growth! Plus, dividends are the cherry on top. At the current share price, the earnings yield works out to be 13 per cent! Also, you are earning a fully franked dividend yield of 6 per cent. I believe strongly that if you become a Bluey member, you will feel confident and gain a higher level of clarity investing your money into the Australian listed companies on the ASX.

One point of difference from other investor courses is that membership in the Blueprint is for 12 months, whereas other investor courses give you only a few hours of content using out of date examples, but with the membership, you get up-to-date analysis on a number of high-quality ASX listed companies and explore exciting fast-growing companies.

Check it out now — Click Here. You will not be surprised to learn, that one of the most insightful investment concepts I learned early on on my investing […]. Yahoo Finance. You will not be surprised to learn, that one of the most insightful investment concepts I learned early on on my investing […] Share this: Twitter Facebook Email LinkedIn.

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The Truth about the Earnings Power Value

Here is how Investopedia describes the EPV model:. As Investopedia suggests, calculating adjusted earnings is part art, part science. The models on finbox. You can also build your own updated model on finbox.


Earnings Power Value (EPV) Model

Buffett and other respected investors mention that if you need a spreadsheet to determine a fair value of a company, the investment idea should be thrown into the pass pile. I only agree to some degree on this comment. For me, as I run through companies, I always look at the free cash flow and cash flow statement first to determine whether the business is worth investigating. So even with 4 analysis tools in my toolkit, there is a hole that needs to be filled. Currently, I am still unable to value companies that are:. The stock valuation method allows the investor to value all of the above points.

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