P/E (Intrinsic Long Term) Modelling

Subject : P/E (Intrinsic Long Term) Modelling

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(1) Basic Concepts :

A company which survives in the long run:

(i)

Its RETURN (ROIC & ROA) Must exceed CICC and CTAC or their Mean.

(ii)

P/E (Intrinsic Long Term) is proportional to ROIC, ROA or their Mean.

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(2)

P/E Modelling :

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A company which can survive in the long run:

P/E (Long Run) lies between ROIC & CICC or ROA & CTAC.

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Taking Geometric Mean:

P/E (Long Run) = √(ROIC × CICC)

or

P/E (Long Run) = √(ROA × CTAC)

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Integrating √(ROIC × CICC) & √(ROA × CTAC) by Geometric Mean:

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P/E (Intrinsic Long Term)

= √( √(ROIC × CICC) × √(ROA × CTAC) )

= ⁴√(ROIC × ROA × CICC × CTAC)

= (ROIC × ROA × CICC × CTAC)^(1÷4)

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Where :

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CICC Factor

= Clean Invested Capital Cost Factor

= 30Y Government Bond Yield Factor × (1 + D/E × (1 + Prime Ratio + Spread Ratio) ÷ (1 + D/E)

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CTAC Factor

= Clean Total Assets Cost Factor

= 30Y Government Bond Yield Factor × (1 + Total Liabilities/Total Equity × (1 + Prime Ratio + Spread Ratio) ÷ (1 + Total Liabilities/Total Equity)

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ROIC

= 100 × Net Income ÷ (Total Equity + Total Interest Bearing Borrowings)

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ROA

= 100 × Net Income ÷ Total Assets

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CICC

= 100 × (CICC Factor - 1)

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CTAC

= 100 × (CTAC Factor - 1)