One of the many difficult question to answer in investing is what drives value of business
What makes one business to trade at a premium to other business in eyes of market participants and how does one identify any such business which is out there and still not recognised by Markets
There is an excellent thread on Valuepickr and I keep going to as it does a great job of answering these question
First lets understand they key value drivers, Most of what I am proposing below is based on this excellent paper by Bear Stearns1 .
Value increases by
- Growing operating profit and investing in NPV positive opportunities
- Increasing ROIC (by taking capital out of the business or identifying high return projects)
- Reducing WACC (Lowering risk)
- Extending competitive advantage period (CAP)
Let’s give this a fancy name – 4 pillar framework
Can we put above theory in practice lets tackle each of the above components one by one
1. Growing operating profit and investing in NPV positive opportunities – This sounds fairly intuitive, has two parts
How can a company improve its operating profit – By Expanding operations or By expanding margins (EBIT as % of sales) – … Read the rest