The Correct Application of Capital Cost; The Divergent and Convergent Nature of Growths; The Constructive and Destructive Nature of Gnet_income; The Constructive and Destructive Nature of B/S’s Growth
Subject : The Correct Application of Capital Cost; The Divergent and Convergent Nature of Growths; The Constructive and Destructive Nature of Gnet_income; The Constructive and Destructive Nature of B/S’s Growths; NetROIC & ROA Competitive Moat Advantage Strength Indicator
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Concept :
Literally, CICC and CTAC (aka Cost of Capital) are used to distinguish the Convergent or Divergent Nature of a Positive Growth; they are not supposed to be used to distinguish the Value Constructiveness or Destructiveness.
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Value Constructiveness is not defined by CTAC & CICC but indeed by Ginvested_capital.
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(A)
Gnet_income is Divergent :
Gnet_income > CICC or CTAC
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Gnet_income is Convergent :
Gnet_income < CICC or CTAC
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(B)
Gtotal_assets is Divergent :
Gtotal_assets > CTAC
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Gtotal_assets is Convergent :
Gtotal_assets < CTAC
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(C)
Ginvested_capital is Divergent :
Ginvested_capital > CICC
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Ginvested_capital is Convergent :
Ginvested_capital < CICC
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(D)
Gtotal_equity is Divergent :
Gtotal_equity > Inflation or Bond Yield Rate
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Gtotal_equity is Convergent :
Gtotal_equity < Inflation or Bond Yield Rate
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(E)
Gnet_income & Gintrinsic_value are Intrinsically Constructive :
Gintrinsic_value > 1
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Gnet_income is Intrinsically Destructive :
Gintrinsic_value < 1
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Where,
Gintrinsic_value
= (1 + Gnet_income Ratio)^2 ÷ (1 + Ginvested_capital Ratio
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(F)
B/S’s Growths are Constructive :
Gtotal_equity > Gtotal_assets > Gtotal_liabilities
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B/S’s Growths are Destructive :
Gtotal_equity < Gtotal_assets < Gtotal_liabilities
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Reference :
https://open.substack.com/pub/absolutetoal/p/the-assets-productive-structure-criteria?utm_source=share&utm_medium=android&r=5g11d4
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(G)
Gnetroic
= (1 + Gnet_income Ratio) ÷ (1 + Ginvested_capital Ratio)
≥ 1, Netroic is sustaining or growing, operational efficiency and profitability rises.
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(H)
Groa
= (1 + Gnet_income Ratio) ÷ (1 + Gtotal_assets Ratio)
≥ 1, ROA is sustaining or growing, operational efficiency and profitability rises.
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(I)
NetROIC Competitive Moat Advantage Strength Indicator
= NetROIC ÷ CICC
≥ 3, Superior
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(J)
ROA Competitive Moat Advantage Strength Indicator
= ROA ÷ CTAC
≥ 1.5, Superior
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Comment :
For a Truly Superb Compounder, All Growths should be Divergent and Constructive !
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Notes:
(I)
Clean Invested Capital Cost (CICC) Factor
= Inflation Factor × (1 + D/E × (1 + 2 × Bond Ratio)) ÷ (1 + D/E)
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CICC
= 100 × (CICC Factor - 1)
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(II)
Clean Total Assets Cost (CTAC) Factor
= Inflation Factor × (1 + Total Liabilities/Total Equity × (1 + 2 × Bond Ratio)) ÷ (1 + Total Liabilities/Total Equity)
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CTAC
= 100 × (CTAC Factor - 1)
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(III)
Bond Rate could replace Inflation Rate if their difference are small.
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(IV)
But For Latin America, the gap between Inflation Rate and Bond Rate could be significantly large. So the Bond Rate could not be used to replace Inflation Rate.