I am not so clear in how you compute every entry in the matrix. For example: for a profit growth of 25% and a RRoR of 5% the entry is 79. How is 79 obtained?
Thanks for the question! It's always hard to know how clear my explanations are without feedback 😅.
So, the number is my acceptance P/E based on:
1. The company's expected yearly growth for the coming 15 years
2. the percentage I want the stock to go up (dividends included) yearly.
So, I would consider buying a stock with the P/E ratio of 79x if I expect the company's profits (operating income) to grow 25% every year for 15 years, and if I was happy with a 5% increase in the stock-price yearly during that period.
This matrix is more of a guide than exact science as it's impossible to accurately predict the stock-price or profit growth 15 years into the future, but it gives you a good indication of if the stock is way too expensive or might be cheap. Overall, I think the matrix is a good starting point before digging deeper into a company.
I am not so clear in how you compute every entry in the matrix. For example: for a profit growth of 25% and a RRoR of 5% the entry is 79. How is 79 obtained?
Thanks for the question! It's always hard to know how clear my explanations are without feedback 😅.
So, the number is my acceptance P/E based on:
1. The company's expected yearly growth for the coming 15 years
2. the percentage I want the stock to go up (dividends included) yearly.
So, I would consider buying a stock with the P/E ratio of 79x if I expect the company's profits (operating income) to grow 25% every year for 15 years, and if I was happy with a 5% increase in the stock-price yearly during that period.
This matrix is more of a guide than exact science as it's impossible to accurately predict the stock-price or profit growth 15 years into the future, but it gives you a good indication of if the stock is way too expensive or might be cheap. Overall, I think the matrix is a good starting point before digging deeper into a company.
The number 79 is based on the present value of future earnings during the 15-year period and a subjective interpretation of the RRoR on this post: https://community.redeye.se/posts/generella-tankar-om-pe-tal-och-motiverade-multiplar [in Swedish].
Is this explanation understandable, or are there parts that are still unclear?
How did you obtain the 5 year growth number? I'm looking around but I really id not see any indicator.