Framework for Economic Profit and Growth Analysis PPT

This PPT slide, part of the 164-slide Valuation Training PowerPoint presentation, presents a framework for understanding how value is derived from economic profit and growth. It is structured as a four-quadrant matrix, with the vertical axis representing growth and the horizontal axis indicating the relationship between return on invested capital (ROIC) and weighted average cost of capital (WACC).

In the top right quadrant, labeled "Power House," businesses achieve both high growth and favorable economic profit. This quadrant signifies optimal performance, where companies effectively leverage their capital to generate substantial returns. The implication here is that these firms are positioned for sustainable success, balancing growth with profitability.

The top left quadrant, "Capital Junkies," indicates firms that experience high growth, but struggle with economic profit. These companies may be investing heavily in growth initiatives without achieving adequate returns, suggesting a potential misalignment in capital allocation.

The bottom left quadrant, "Capital Killers," represents businesses that exhibit low growth and low economic profit. This situation is typically unsustainable, as these firms may be consuming resources without generating sufficient returns. The guidance here is clear: once a company identifies a successful strategy or product, it should focus on growth to escape this quadrant.

Lastly, the bottom right quadrant, "Cash Cows," shows firms that generate high economic profit, but have low growth. These businesses are often in a mature phase, providing steady cash flow, but lacking expansion opportunities. The slide emphasizes that understanding the interplay of return, growth, and capital cost is crucial for effective valuation analysis, guiding strategic decisions for potential investments or operational improvements.

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M&A (Mergers & Acquisitions) Valuation