I think my brain just exploded. Can anyone explain this method in terms that make a little more sense. Please help.
P/E=(1-b)/(r-g) can be proved to be equal to P/E = 1/r + (FF)*(G) 1/r = Tangible P/E --> every $ of earning is invested in a perpetuity will earn this much. FF = Franchise Factor = 1/r - 1/ROE (Amount your ROE generates over and above your required rate of return) = (ROE-r)/(ROE.r). Bigger this number is, higher is your competitive advantage as a firm. G=Growth Factor=g/(r-g) The rest of the stuff in those two pages is the derivation of the formula above. P/E is called the Intrinsic P/E.
So “G” will just tell you how sustainable the “excess ROE” aka competitive advantage is?
now read the rest of it… that should make things clearer… also search for posts last year around this time by Hiredguns1… they throw a lot of light on this same subject.
an update… tried to search for the post myself, but was unable to get it. sorry…