Hi Peter,
I’m looking at a company which is running at net debt. But it revenue, ROE are showing double digit growth. Because of its high ROE and dividend retention rate when using formula (k-g) it will give negative value because the growth is higher than my desire return.
Do you have other idea how to value this kind of company?
When the growth is very high, we put a limit to it. Usually g = 10% maximum.
The reason is that the formula is assuming the growth is perpetuate (forever). We know that logically no company can keep growing at a high rate forever because the population is finite.
So as long as your k > g, you shouldn’t get a negative number.
Thanks KC for your help answer my question
what would it indicate if growth is greater than the required return k > g ?
On the other hand, I noticed that US stocks do not have “dividend payout ratio” , thus I couldn’t calculate g =roe*(1-dividend payout ratio). Do you have any stock analysis video for US stocks for learning?