Quote:
Originally Posted by Nightfyre
Additionally, why use the rule of 72 when you can just take EPS*(1+net profit growth) ^10
You can create a spreadsheet to do all this in like thirty seconds plus easily allow you to change or have a spectrum of different earnings growth rates.
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Just makes it quick to run numbers in your head when reviewing financial statements. I typically look for growth rates of 10% or higher in ROIC, ROE, EPS, Sales, BVPS, and and OCPS combined with minimal debt. I look at 10 year, 7 year, 5 year, 3 year, 1 year. If I see 10% or higher in all of these areas and it's not dropping significantly, then I look to dig deeper with more accurate numbers in Excel or other tools. So again, rule of 72 makes this quick to calculate in your head while scanning statements.
The idea is if ROIC and ROE are 10% or higher consistently for 10/7/5/3/1 year, then management of that company is probably pretty solid and looking out for shareholders.
If EPS, Sales, BVPS, and OCPS are 10% or higher consistently for 10/7/5/3/1, then that's a good sign the company has a strong moat in place.
So the valuation model depends on those things being true, which makes the future valuation more predictable, which of course is what the whole thing is based on.
So again, in this case I think there's just not enough history behind it, and I should not get greedy and stick to the model. Thanks again.