87 - Cost of Growth Valuation and Asset / Earnings Equivalence

References:

This episode was inspired by a Twitter thread where I responded to a poll on how to value companies. That thread is available at the following link:

https://twitter.com/TreyHenninger/status/1288475399861817352

Mental Models discussed in this podcast:

• Cost of Growth Valuation
• Gordon Growth Model
• Asset / Earnings Equivalence
• Retained Earnings
• Return on Invested Capital
• Earnings Yield
• Dividend Yield

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode87

Summary:

Growth is not free for most companies. It costs something. The cost of growth valuation model takes into account return on invested capital when valuing stocks. Most companies have to retain earnings in order to grow.

Assets are only as valuable as the earnings they create. You can't take credit for both book value (assets) and earnings power in the same valuation on a stock. It's a problem of double counting that leads to overvaluation.