In my opinion your adjusted earnings calculation have one point that have to be improved. If you account for intangibles in capex (SG&A,R&D, intangibles acquired…) you have to put that all in your asset base to correctly calculate the capital intensity. I have tried to adjust the greenwald method to intangibles (makes sense nowdays) but is a hard task, because of the dificulty to pile all the acumulated intangible assets and amortization to arrive at something similar to Net PPE. Greewald method to calculate the intrínsic value of a company is for me the right WAY to do, i need to work my model to achieve a degree of confidence and use it as my main method. Thanks for the article!
Interesting perspective, but they are both accurate as it being the cost and profit. WACC is both a cost to the company and a required return to investors.
Also the EPV ratio is simplistic not defective, the logic is that EPV represents the perpetual value of current normalized earnings, assuming zero future growth.
In my opinion your adjusted earnings calculation have one point that have to be improved. If you account for intangibles in capex (SG&A,R&D, intangibles acquired…) you have to put that all in your asset base to correctly calculate the capital intensity. I have tried to adjust the greenwald method to intangibles (makes sense nowdays) but is a hard task, because of the dificulty to pile all the acumulated intangible assets and amortization to arrive at something similar to Net PPE. Greewald method to calculate the intrínsic value of a company is for me the right WAY to do, i need to work my model to achieve a degree of confidence and use it as my main method. Thanks for the article!
Thanks for posting the best practical application of Greenwald's book that I have seen!
Actually, The EPV = Adj Earning ÷ WACC_ratio Formula is logically defective.
Secondly, WACC is not a cost.
I deem WACC as Profitability Threshold.
ROIC and WACC belong to the same profitability family.
Company with competitive advantage will always have ROIC > WACC in the short and long run.
Company with no competitive advantage will eventually have ROIC ≈ WACC in the long run.
I would fix the EPV this way:
EPV (fixed) = Adj Earning × ROIC
or
EPV (fixed) = Adj Earning × (ROIC + WACC) ÷ 2
or
EPV (fixed) = Adj Earning × 100 × { √[ (1+ROIC_ratio)×(1+WACC_ratio) ] - 1 }
or
EPV (fixed) = Adj Earning × √(ROIC × WACC)
Interesting perspective, but they are both accurate as it being the cost and profit. WACC is both a cost to the company and a required return to investors.
Also the EPV ratio is simplistic not defective, the logic is that EPV represents the perpetual value of current normalized earnings, assuming zero future growth.