Dear Tiago, Thanks for such a thorough explanation, Aflac is an incredible company and is a favourite company of mine. What I cannot understand is where did you get the 0.181 from in the Profit Margin to PE Method. I looked at the KO and PEP example and I still couldn't figure it out. Am I missing something?
The 0.181 number is Aflacs profit margin (pre-tax). It is calculated by dividing the pre-tax income by the total revenue. If we multiply that by 100, we have the 18.1% margin that we are familiar with.
Effectively what this means for the Profit margin to PE method is that if AFL is selling at a PE below 18.1 it is undervalued.
No, the operating margin is something else. The main difference is that Operating Margin is pre-interest costs, whereas this measure includes the costs related to interest.
In companies with low to no interest related expenses, the two will be a very similar value, however when we discuss companies with high debt load, they will have lower profit margins, since that cash is being channeled to service debt rather than to investors.
Thank You I really like how you keep it simple. Where did you learn this form? It sounds like a Ben Graham type calculation. Is it your preferred valuation tool?
I came up with it myself when i was looking for a measure that would be sufficiently generic to apply to a large group of companies, while still capturing information relative to the enduring strength of the business.
The idea is that companies that can hold high profit margins, that is, companies that capture higher percentages of revenue to its shareholders, have higher pricing power both towards their clients and suppliers, and therefore will be able to maintain profitability for longer., which therefore makes a higher PE less risky.
The main books i used to come up with it was indeed "The intelligent investor", as well as "Warren Buffet and the interpretation of financial statements".
It's not a perfect calculation, but i find that it's a fairly easy way to see whether or not you're overpaying for something, so i use it as a quick screener as to whether or not i want to invest in a company.
Do keep in mind, that just because a company fails the test doesn't mean its automatically un-investable. $PEP failed the test, but it was close enough, and the rest of the business was solid enough that i was confident in making that bet.
Well done! I like the approach. I like simple ways of approximating value. I also have a set of ''10 minute'' tests which I use to determine a company's valuation relative to its trading price. Do you also have an established screening and/or investment process which you use? I am asking because I like how you reengineered your portfolio and our lists concur.
Dear Tiago, Thanks for such a thorough explanation, Aflac is an incredible company and is a favourite company of mine. What I cannot understand is where did you get the 0.181 from in the Profit Margin to PE Method. I looked at the KO and PEP example and I still couldn't figure it out. Am I missing something?
Dear Tiago, Thanks for such a thorough explanation, Aflac is an incredible company and is a favourite company of mine. What I cannot understand is where did you get the 0.181 from in the Profit Margin to PE Method. I looked at the KO and PEP example and I still couldn't figure it out. Am I missing something?
Thank You.
Hello Denny,
The 0.181 number is Aflacs profit margin (pre-tax). It is calculated by dividing the pre-tax income by the total revenue. If we multiply that by 100, we have the 18.1% margin that we are familiar with.
Effectively what this means for the Profit margin to PE method is that if AFL is selling at a PE below 18.1 it is undervalued.
Best regards,
Tiago
Thank You Tiago - I guess that is also called the Operating Margin correct?
No, the operating margin is something else. The main difference is that Operating Margin is pre-interest costs, whereas this measure includes the costs related to interest.
In companies with low to no interest related expenses, the two will be a very similar value, however when we discuss companies with high debt load, they will have lower profit margins, since that cash is being channeled to service debt rather than to investors.
Thank You I really like how you keep it simple. Where did you learn this form? It sounds like a Ben Graham type calculation. Is it your preferred valuation tool?
I came up with it myself when i was looking for a measure that would be sufficiently generic to apply to a large group of companies, while still capturing information relative to the enduring strength of the business.
The idea is that companies that can hold high profit margins, that is, companies that capture higher percentages of revenue to its shareholders, have higher pricing power both towards their clients and suppliers, and therefore will be able to maintain profitability for longer., which therefore makes a higher PE less risky.
The main books i used to come up with it was indeed "The intelligent investor", as well as "Warren Buffet and the interpretation of financial statements".
It's not a perfect calculation, but i find that it's a fairly easy way to see whether or not you're overpaying for something, so i use it as a quick screener as to whether or not i want to invest in a company.
Do keep in mind, that just because a company fails the test doesn't mean its automatically un-investable. $PEP failed the test, but it was close enough, and the rest of the business was solid enough that i was confident in making that bet.
Well done! I like the approach. I like simple ways of approximating value. I also have a set of ''10 minute'' tests which I use to determine a company's valuation relative to its trading price. Do you also have an established screening and/or investment process which you use? I am asking because I like how you reengineered your portfolio and our lists concur.
Dear Tiago, Thanks for such a thorough explanation, Aflac is an incredible company and is a favourite company of mine. What I cannot understand is where did you get the 0.181 from in the Profit Margin to PE Method. I looked at the KO and PEP example and I still couldn't figure it out. Am I missing something?
Thank You.