Great article!. Could you calculate the reinvestment rate = (Net Income - Dividends) / Net Income?. And then use ROCE instead if ROIC to make compounding?
The Buffett-Munger Profitability Investing Truism Dharma 144:
Enhanced Expected Net Profit Growth Rate Equation
33.1.
The Original Expected Net Profit Growth Rate Equation ( Genp = ROIC × Rrinv ) fails to explain when Genp > ROIC × Rrinv.
33.2.
The Original equation apparently has missed out the 3rd variable, the quality of asset.
33.3.
For the quality of assets, I break it down into two:
Total Assets and Current Asset
33.4.
For the quality of Total Assets, I will take the:
ROA (Net Profit/Total Assets)
or Justified ROIC (Net Profit/Justified Invested Capital)
and
Assets Turnover Ratio (Revenue ÷ Total Assets)
33.5.
For the quality of Current Assets, I will take the Current To Liabilities Ratio (Current Asset ÷ Total Liabilities).
Definition:
Body Bioavailability
= the proportion of a drug or other substance which enters the circulation when introduced into the body and so is able to have an active effect.
Operation Bioavailability
= the proportion of an ASSET which enters the CASH FLOW when introduced into the OPERATION and so is able to have an active effect.
Current To Liabilities Ratio (Current Asset ÷ Total Liabilities) is the strength of the Operation Bioavailability.
33.6.
Design:
Enhanced Expected Gross Profit Growth Rate, Gegp
= ROA × Rrinv × Rctl × Rrta
Enhanced Expected Net Profit Growth Rate, Genp (max)
= Justified ROIC × Rrinv × Rctl × Rrta (max)
Enhanced Expected Net Profit Growth Rate, Genp (min)
= Gegp
= ROA × Rrinv × Rctl × Rrta
If Ggp > ( ROA × Rrinv × Rctl × Rrta ), it indicate :
Extra Competitive Advantages
other than the ROA Profitability Moat and Balance Sheet Castle.
33.7
Ggp > ROA > P/E
or
P/E < ROA < Ggp
might signal that :
an undervalued and concentrated investing opportunity has arisen.
Notes:
Usually, Genp > Gegp for an efficient company.
Genp
= Expected Net Profit Growth
Gegp
= Expected Gross Profit Growth
GPA
= Gross Profitability
= Gross Profit ÷ Total Assets
Rrinv
= Reinvestment Ratio
= 1 - Dividend Payout
= 1 - DPS/EPS
Rctl
= Current Asset ÷ Total Liabilities Ratio
Rrta
= Assets Turnover Ratio
= Revenue ÷ Total Assets
33.8.
Example:
ROA
= 100 × ( Net Profit ÷ Total Assets )
= 18.79
Justified ROIC
= 100 × ( Net Profit ÷ Justified Invested Capital )
= 100 × ( Net Profit ÷ Invested Capital )
{ Since ( Cash & Cash Equivalent ÷ Total Liabilities ) < 1, there is no Idle Cash as the excess cash is reinvested efficiently, thus Justified Invested Capital = Invested Capital }
Actually Warren Buffett’s compounding history is not that much great compare to some other value investors. His Coke & Amex gave 25X, Sea’s Candy was the best.
But he did not look for the compounders, he always focused on more cashflow and predictability more than compounders. BH had the huge advantage of holding lot of private companies and insurance float which made billions over the years.
Fantastic and super helpful breakdown of some key concepts. Thanks for taking the time to write and post this.
I have a lot of respect for Buffet, but I think his strategy has lost its zeal, little by little, year by year.
what a great article, the essence of investing in compounders, profound and still easy to follow. Thanks. Ralf
Thank you for the comment, Ralf. It means a lot!
https://thedeeptrailblazer.substack.com/p/be-the-lion-a-roaring-guide-to-overcoming?r=3ysplc&utm_medium=ios
Great article!. Could you calculate the reinvestment rate = (Net Income - Dividends) / Net Income?. And then use ROCE instead if ROIC to make compounding?
The better Expected Growth formula:
The Buffett-Munger Profitability Investing Truism Dharma 144:
Enhanced Expected Net Profit Growth Rate Equation
33.1.
The Original Expected Net Profit Growth Rate Equation ( Genp = ROIC × Rrinv ) fails to explain when Genp > ROIC × Rrinv.
33.2.
The Original equation apparently has missed out the 3rd variable, the quality of asset.
33.3.
For the quality of assets, I break it down into two:
Total Assets and Current Asset
33.4.
For the quality of Total Assets, I will take the:
ROA (Net Profit/Total Assets)
or Justified ROIC (Net Profit/Justified Invested Capital)
and
Assets Turnover Ratio (Revenue ÷ Total Assets)
33.5.
For the quality of Current Assets, I will take the Current To Liabilities Ratio (Current Asset ÷ Total Liabilities).
Definition:
Body Bioavailability
= the proportion of a drug or other substance which enters the circulation when introduced into the body and so is able to have an active effect.
Operation Bioavailability
= the proportion of an ASSET which enters the CASH FLOW when introduced into the OPERATION and so is able to have an active effect.
Current To Liabilities Ratio (Current Asset ÷ Total Liabilities) is the strength of the Operation Bioavailability.
33.6.
Design:
Enhanced Expected Gross Profit Growth Rate, Gegp
= ROA × Rrinv × Rctl × Rrta
Enhanced Expected Net Profit Growth Rate, Genp (max)
= Justified ROIC × Rrinv × Rctl × Rrta (max)
Enhanced Expected Net Profit Growth Rate, Genp (min)
= Gegp
= ROA × Rrinv × Rctl × Rrta
If Ggp > ( ROA × Rrinv × Rctl × Rrta ), it indicate :
Extra Competitive Advantages
other than the ROA Profitability Moat and Balance Sheet Castle.
33.7
Ggp > ROA > P/E
or
P/E < ROA < Ggp
might signal that :
an undervalued and concentrated investing opportunity has arisen.
Notes:
Usually, Genp > Gegp for an efficient company.
Genp
= Expected Net Profit Growth
Gegp
= Expected Gross Profit Growth
GPA
= Gross Profitability
= Gross Profit ÷ Total Assets
Rrinv
= Reinvestment Ratio
= 1 - Dividend Payout
= 1 - DPS/EPS
Rctl
= Current Asset ÷ Total Liabilities Ratio
Rrta
= Assets Turnover Ratio
= Revenue ÷ Total Assets
33.8.
Example:
ROA
= 100 × ( Net Profit ÷ Total Assets )
= 18.79
Justified ROIC
= 100 × ( Net Profit ÷ Justified Invested Capital )
= 100 × ( Net Profit ÷ Invested Capital )
{ Since ( Cash & Cash Equivalent ÷ Total Liabilities ) < 1, there is no Idle Cash as the excess cash is reinvested efficiently, thus Justified Invested Capital = Invested Capital }
= 26.16
Rrinv
= 1 - DPS÷EPS
= 1 - (0.0063+0.0079+0.0138)÷0.0481
= 0.4178794179
Rctl
= Current Asset ÷ Total Liabilities
= 73,409÷26,779
= 2.7412898166
Rrta
= Assets Turnover Ratio
= Revenue ÷ Total Assets
= 101,326÷92,917
= 1.0905001238
Enhanced Expected Gross Profit Growth Rate, Gegp (FYE 2025)
= ROA × Rrinv × Rctl × Rrta
= 18.79×0.4178794179×2.7412898166×1.0905001238
= 23.47
Enhanced Expected Net Profit Growth Rate, Gegp (FYE 2025)
= Justified ROIC × Rrinv × Rctl × Rrta
= 26.16×0.4178794179×2.7412898166×1.0905001238
= 32.68 %
Expected Forward EPS @ FYE 2025
= 0.0481×1.3268
= RM 0.06381908
Expected Forward P/E @ RM 0.84
= 0.84÷0.06381908
= 13.1622079165
According to PEG=1,
P/E (Justified)
= Growth
= Enhanced Expected Net Profit Growth Rate, Genp
= 23.47 (minimum, PEG=1)
= 26.16 (Intrinsic, PEROIC=1)
= 32.68 (maximum, PEG=1)
When IC > CE, takes ROIC.
When CE > takes ROCE.
Actually Warren Buffett’s compounding history is not that much great compare to some other value investors. His Coke & Amex gave 25X, Sea’s Candy was the best.
But he did not look for the compounders, he always focused on more cashflow and predictability more than compounders. BH had the huge advantage of holding lot of private companies and insurance float which made billions over the years.
Good article. How do you calculate the WACC from Yahoo Finance though?