AEPV (ATC's Earning Power Value) : PDD Case Study
Subject: AEPV (ATC’s Earning Power Value) : PDD Case Study
(1)
AEPV (ATC’s Earning Power Value)
= EPS ttm ÷ Discount Factor × ( 1 - [1 ÷ Discount Factor]^POWER) ÷ ( 1 - 1 ÷ Discount Factor )
.
(2)
EARNING :
EPS (Basic) ttm
.
(3)
POWER
= ROIC, ROA or their variants
.
(4)
DISCOUNT FACTOR (applied to Total Assets Case)
= Clean Total Assets Cost Factor
= CTAC Factor
.
Or
DISCOUNT FACTOR (applied to Invested Capital Case)
= Clean Invested CapitalCost Factor
= CICC Factor
.
(5)
CTAC Factor ttm (applied to Total Assets Case)
= Clean Total Assets Cost Factor ttm
= 30Y Government Bond Yield Factor × (1 + Total Liabilities/Total Equity × (1 + Prime Ratio + Spread Ratio) ÷ (1 + Total Liabilities/Total Equity)
.
(6)
CICC Factor ttm (applied to Invested Capital Case)
= Clean Invested Capital Cost Factor ttm
= 30Y Government Bond Yield Factor × (1 + D/E × (1 + Prime Ratio + Spread Ratio) ÷ (1 + D/E)
.
(7)
Supporting Mental Models
i。
“Investors should remember their scorecard isn’t computed using the Olympic-diving method:
Degree-of-difficulty doesn’t count.
If you’re right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.”
— Warren Buffett
ii。
“The higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying business’ return on invested capital.”
— Warren Buffett
iii。
“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much difference than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
— Charlie Munger
iv。
The P/E ratio of any company that’s fairly priced will equal its growth rate. . . . If the P/E of Coca-Cola is 15, you’d expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year...and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown. . . . In general, a P/E ratio that’s half the growth rate is very positive, and one that’s twice the growth rate is very negative.
// Peter Lynch, One Up on Wall Street
v。
“Over the longest period of time, if you do own [the company] through the ups and downs, your return roughly approximates basically the actual business return to actual capital invested in the business itself over the long term. The two tend to really converge pretty closely.”
— Li Lu
vi。
“In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.”
— Joel Greenblatt
vii。
“It is obvious that a variation of merely a few percentage points has an enormous effect on the success of a compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens.”
— Warren Buffett
(8)
Reference :
https://www.investopedia.com/terms/e/earningspowervalue.asp
.
(9)
Case Study:
PDD
(Financial.2025.Sep.Q3.TTM)
EARNING :
EPS (Basic) ttm
= 10.289979567
.
POWER
= ROIC & ROA
= 25.4354775147 & 16.6638511789
.
30Y Government Bond Yield Factor
= 1 + 0.04864
= 1.04864
Prime Ratio = 0.07
Spread Ratio = 0.03
.
CTAC Factor ttm (applied to Total Assets Case)
= Clean Total Assets Cost Factor ttm
= 30Y Government Bond Yield Factor × (1 + Total Liabilities/Total Equity × (1 + Prime Ratio + Spread Ratio) ÷ (1 + Total Liabilities/Total Equity)
= 1.04864×(1+0.5680113735×1.10)÷(1+0.5680113735)
= 1.0866269341
.
CICC Factor ttm (applied to Invested Capital Case)
= Clean Invested Capital Cost Factor ttm
= 30Y Government Bond Yield Factor × (1 + D/E × (1 + Prime Ratio + Spread Ratio) ÷ (1 + D/E)
= 1.04864×(1+0.027270204×1.10)÷(1+0.027270204)
= 1.0514237493
.
(I)
If I want a Discount to weight on the Invested Capital and the ROIC Operational Efficiency and Profitability to determine the POWER runway:
then
.
Discount Factor
= CICC Factor
= 1.0514237493
.
POWER
= ROIC Operational Efficiency and Profitability
= ROIC
= 25.4354775147
.
AEPV (ATC’s Earning Power Value)
= EPS ttm ÷ Discount Factor × ( 1 - [1 ÷ Discount Factor]^POWER) ÷ ( 1 - 1 ÷ Discount Factor )
= 10.289979567÷1.0514237493×(1-(1÷1.0514237493)^25.4354775147)÷(1-1÷1.0514237493)
= USD 144.2131953203 (P/E 14.0149156158)
.
(II)
If I want a Discount to weight on the Total Assets and the ROA Operational Efficiency and Profitability to determine the POWER runway:
then
.
Discount Factor
= CTAC Factor
= 1.0866269341
.
POWER
= ROA Operational Efficiency and Profitability
= ROA
= 16.6638511789
.
then,
.
AEPV (ATC’s Earning Power Value)
= 10.289979567÷1.0866269341×(1-(1÷1.0866269341)^16.6638511789)÷(1-1÷1.0866269341)
= USD 89.0325870515 (P/E 8.6523580024)
.
(III)
If I want a Discount to weight on the Total Assets and the ROIC Operational Efficiency and Profitability to determine the POWER runway:
then
.
Discount Factor
= CTAC Factor
= 1.0866269341
.
POWER
= Operational Efficiency and Profitability
= ROIC
= 25.4354775147
.
then,
.
AEPV (ATC’s Earning Power Value)
= 10.289979567÷1.0866269341×(1-(1÷1.0866269341)^25.4354775147)÷(1-1÷1.0866269341)
= USD 104.4288504051 (P/E 10.1485964792)
.
(IV)
If I want a Geometric Mean of Discount to weight on the Geometric Mean Invested Capital & Total Assets, and the Geometric Mean of ROIC & ROA Operational Efficiency and Profitability to determine the POWER runway:
.
then
.
Geometric Mean Discount Factor
= √(CICC Factor × CTAC Factor)
= √(1.0514237493×1.0866269341)
= 1.068880426
.
POWER
= Geometric Mean Operational Efficiency and Profitability
= √(ROIC × ROA)
= √(25.4354775147×16.6638511789)
= 20.5876907877
.
then,
.
Geometric Mean AEPV (Geometric Mean ATC’s Earning Power Value)
= 10.289979567÷1.068880426×(1-(1÷1.068880426)^20.5876907877)÷(1-1÷1.068880426)
= USD 111.4806781307 (P/E 10.8339066569)
.
(10)
Earnings Power Value (By Bruce Greenwald)
= Adjusted Earnings Per Share ÷ Cost of Capital
.
(i)
If I want a Discount to weight on the Invested Capital,
then
.
Earnings Power Value TTM
= EPS TTM ÷ Clean Invested Capital Cost Ratio (CICC Ratio)
= 10.289979567÷0.0514237493
= USD 200.1016982828 (P/E 19.4462677967)
.
(ii)
If I want a Discount to weight on the Total Assets,
then
.
Earnings Power Value TTM
= EPS TTM ÷ Clean Total Assets Cost Ratio (CTAC Ratio)
= 10.289979567÷0.0866269341
= USD 118.7849907642 (P/E 11.5437538035)
.
(iii)
If I want a Discount to weight on the Geometric Mean of Invested Capital and Total Assets,
then
.
Geometric Mean Earnings Power Value TTM
= EPS TTM ÷ Geometric Mean of CICC & CTAC Ratio
= 10.289979567÷0.068880426
= USD 149.3890233344 (P/E 14.5179125344)
.
(11)
Which is the Intrinsic Value, Bargains and Bottom Fishing?