Manage episode 297526669 series 2927024
00:22 Quick DCF model overview
02:03 DCF alternatives that are not CAPM related
05:00 The DCF alternative is: reinvested capital
08:36 DCF alternative: assumptions and adjustments
11:12 Where is the money going?
14:04 Summing up reinvested capital model as a DCF alternative
The reinvested capital model is meant to be used in growth companies, such as FAANG stocks.
Reinvested capital model is a DCF alternative for companies that reinvest into their business, so it doesn’t make sense to use with companies that aren’t expected to grow. It uses returns on capital, so by definition it penalizes companies with lots of debt and cash (some people don’t throw cash into ROC, I conservatively do). It favours companies that reinvest back into the business.
I love it because reinvesting profits for growth is my favourite capital allocation option. It is riskier for an investor than to distribute it, but more rewarding if the company has a long-term competitive advantage. An exception to this is reinvesting heavily into non-core businesses.
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