By
Borsgade
In his latest article titled The Math of Value and Growth, Michael Mauboussin explores the relationship between growth, return on capital, and the discount rate in valuing financial assets.
The document emphasizes that most investors use multiples such as P/E for valuation, which can obscure the underlying drivers of value. Michael argues that the distinction between value and growth stocks is often misleading. The focus should be on value-creating growth, where the return on investment exceeds the cost of capital. He also highlights the importance of understanding how changes in growth rates, return on invested capital, and discount rates affect valuations.
Here are the key topics covered:
Most investors value stocks using multiples and also seek to distinguish between value and growth stocks. But these practices obscure the important drivers of value, and very few investors have a clear sense of how revisions in expectations for those drivers change multiples.
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