Tag: Page Industries

Why Paying up can cost you – Analysis using payback box

Motilal Oswal wealth studies are great source of learnings for any investor, They adopt a unique approach of taking up a theoretical concept every year and then explain it through numbers.

In year 2000, they introduced a concept called payback period, this is what the study said

Focus on payback period

As the legendary Warren Buffett says, “Investing is laying out money now to get more money back in the future in real terms, after taking inflation into account”

Generally, it is observed that market price is often based on the assumption that earnings will grow at their current rate for another five or more years and then remains constant

P/E is a very useful tool of valuation but does not reflect growth assumption upfront

PEG is another useful tool but assumes stable growth rate for a long time. It also relies too much on current growth rates. But the reality is that new economy companies record high growth rates in the initial stages, but are unable to sustain for a long period. This leads to mis-pricing

Keeping the above shortcomings and market wisdom in mind, we decided to examine the concept of “pay-back ratio” or “purchase price recovery in

… Read the rest

Get a framework to understand Value

One of the many difficult question to answer in investing is what drives value of business

What makes one business to trade at a premium to other business in eyes of market participants and how does one identify any such business which is out there and still not recognised by Markets

There is an excellent thread on Valuepickr and I keep going to as it does a great job of answering these question

First lets understand they key value drivers, Most of what I am proposing below is based on this excellent paper by Bear Stearns1 .

Value increases by

  1. Growing operating profit and investing in NPV positive opportunities
  2. Increasing ROIC (by taking capital out of the business or identifying high return projects)
  3. Reducing WACC (Lowering risk)
  4. Extending competitive advantage period (CAP)

Let’s give this a fancy name – 4 pillar framework

Can we put above theory in practice lets tackle each of the above components one by one

1. Growing operating profit and investing in NPV positive opportunities – This sounds fairly intuitive, has two parts

How can a company improve its operating profit – By Expanding operations or By expanding margins (EBIT as % of sales) – … Read the rest

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