Average (Growth & ROIC) and Average Margin

A1.

For ROIC:

Arithmetic Mean

= (ROIC1 + ROIC2 + … + ROICN) ÷ N

.

A2.

For Margin:

Arithmetic Mean

= (Margin1 + Margin2 + … + MarginN) ÷ N

.

A3.

For Growth:

Geometric Mean

= [ (G1 × G2 × … + GN) ]^(1÷N)

.

B.

Margin and ROIC can be integrated for Arithmetic Mean due to the same nature.

.

C.

ROIC by right can not be integrated with Growth due to difference in nature.

But Warren Buffett and Charlie Munger assume that the ROIC & Growth converge to each other over the long run, that breaks the rule to make an exception:

.

Average of ROIC & Growth

= Geometric Mean Method 1 (lower figure produced)

= √(ROIC × G)

or

= Geometric Mean Method 2 (accurate, but higher figure produced)

= 100 x { √[ (1 + ROICratio) × (1 + Growthratio) ] - 1 }

.

As a prudent and conservative value for quality investor, I opt for Geometric Mean Method 1 in intrinsic valuation, which is based on the ROIC & Net Profit Growth, for a lower figure produced, and I ensure my bidding price is lower than it.