P/E to FCP (Forward Composite Profitability) Weight Ratio, Analyzed By Deepseek
P/E to FCP (Forward Composite Profitability) Weight Ratio, Analyzed By Deepseek
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By ATC
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Dear Deepseek,
About the Weighing Machine mentioned by Benjamin Graham, let's devise a Weight Ratio.
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I am thinking of the following :
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Revised :
Prerequisite :
ROIC > Clean Invested Capital Cost
ROA > Clean Invested Capital Cost
√(ROIC × ROA) > Clean Invested Capital Cost
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Clean Invested Capital Cost (CICC) Factor
= 10 Years Government Bond Factor × (1 + D/E × Prime_Spread Factor) ÷ (1 + D/E)
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For a low debts company, the Clean Invested Capital Cost is between 4.5% to 5.5%.
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Convention:
XXX Factor = 1 + XXX ratio
XXX Rate = 100 × XXX Ratio
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ROIC is positive.
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ROA is positive.
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P/E to Forward Composite Profitability Weight Ratio
= P/E ÷ Forward Composite Profitability
> 1, overvalued
< 1, undervalued
= 1, intrinsic value
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where,
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Forward Composite Profitability (FCP)
= √{ ROIC TTM × ROA TTM × Gnet_income Factor TTM² ÷ [ Ginvested_capital Factor TTM × Gtotal_assets Factor TTM ] }
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The square root is to take Geometric Mean.
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Please take note that the FCP can be bigger or smaller than ROIC depending on the Growth Factor Variables as the growth ratio can be positive or negative.
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ROIC = 100 × Net Income ÷ (Total Equity + Total Debts)
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ROA = 100 × Net Income ÷ Total Assets
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ROIC & ROA are used as a whole number, for instance 14, you should not use decimal fraction 0.14 on ROIC and ROA.
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Gnet_income Factor
= 1 + Gnet_income Ratio
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Ginvested_capital Factor
= 1 + Ginvestor_capital Ratio
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Gtotal_assets Factor
= 1 + Gtotal_assets Ratio
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Gnet_income = Net Income Growth
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Ginvestor_capital = Invested Capital Growth
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Gtotal_assets = Total Assets Growth
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Growth Ratio can be positive or negative.
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Example :
P/E = 15, ROIC TTM = 24, ROA TTM = 12, Gnet_income Factor TTM = 0.93, Ginvested_capital Factor TTM = 1.11, Gtotal_assets Factor TTM = 1.09,
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then
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FCP
= √{ ROIC TTM × ROA TTM × Gnet_income Factor TTM² ÷ [ Ginvested_capital Factor TTM × Gtotal_assets Factor TTM ] }
= √{ 24 × 12 × 0.93^2 ÷ [ 1.11 × 1.09] }
= 14.3484323373
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Thus,
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P/E to FCP Weight Ratio
= P/E ÷ FCP
= 15 ÷ 14.3484323373
= 1.0454103729
>1, overvalued
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Risk has already been handled by the lower value of √(ROIC × ROA) instead of the higher value of ROIC or the higher value of ROIC-CICC.
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You may skip introducing the Risk Variable into the formula.
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I don't advocate using estimated future growth as estimation is subjective to personal thought and subject to complicated macroeconomy uncertainties.
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Furthermore, ROIC and ROA embed Growth.
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When the real future growth significantly enlarges, both the real future ROIC and the real future ROA enlarge significantly too.
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You may skip introducing the estimated future growth variable into the formula.
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P/E to FCP Weight Ratio is akin to PEG ratio, both FCP and G carry %.
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In fact % itself does not carry any unit such as Dollars or Kilogram.
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100 × 0.xx Ratio carries no measurement unit .
xx% = 100 × 0.xx Ratio also carries no measurement unit
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Please skip arguing on the % as a measurement unit.
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Kindly analyze and comment on the formulas.
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Thanks
