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During the course of the year, investors also rediscovered that the essence of business is not growing revenues or adding users, but making profits from that growth. In this post, I will focus on trend lines in profitability at companies in 2022, with the intent of addressing multiple questions.
Setting the Stage The notion of a business life cycle is neither new nor original, since versions of it have floated around in management circles for decades, but its applications in finance have been spotty, with some attempts to tie where a company is in the life cycle to its corporate governance and others to accounting ratios.
In my last three posts, I looked at the macro (equity risk premiums, default spreads, risk free rates) and micro (company risk measures) that feed into the expected returns we demand on investments, and argued that these expected returns become hurdlerates for businesses, in the form of costs of equity and capital.
BUCKLEY: They were all institutional separate accounts. And you know, just simple things like, hey, the value of tax loss harvesting, how do you make that apparent to people? BUCKLEY: Well, the way we’re built, being client owned, it’s the way we return profits to our clients. That means a low hurdlerate.
What is a hurdlerate for a business? In this post, I will start by looking at the role that hurdlerates play in running a business, with the consequences of setting them too high or too low, and then look at the fundamentals that should cause hurdlerates to vary across companies. What is a hurdlerate?
The dividend principle, which is the focus of this post is built on a very simple principle, which is that if a company is unable to find investments that make returns that meet its hurdlerate thresholds, it should return cash back to the owners in that business.
While the universe of companies is diverse, with approximately half of all firms from emerging markets, it is more concentrated in market capitalization, with the US accounting for 40% of global market capitalization at the start of the year.
I also have quirks in how I compute widely used statistics like accounting returns on capital or debt ratios, and I will stay with those quirks, no matter what the accounting rule writers say. Valuation Pricing Growth & Reinvestment Profitability Risk Multiple s 1. Profit Margins 1. Aggregate operating numbers 3.
So you’ve got, you’ve got a modeling hurdlerate that you need to figure out when you’re adding diversifiers. That is their savings account, particularly when cash is returning nothing. I, I kind of feel a little bit of a loss that that’s gone away. The second is behavioral. Real really intriguing.
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