Joel Tillinghast's Valuation Framework

Valuation framework by Joel Tillinghast (from Big Money Thinks Small):

Relate the Discount Rate to FCF Yield (using the Gordon Growth model):
```
Discount Rate = FCF Yield + FCF Growth Rate
```
Rearranging this gives the FCF yield to require at your chosen discount rate:
```
FCF Yield = Discount Rate - FCF Growth Rate
```
This only holds if growth is steady over the long run and below the discount rate.
Calculate the Reinvestment Rate: Use the Return on Equity (ROE) earned on reinvested earnings to identify the portion of earnings that must be reinvested to achieve FCF growth:
```
Reinvestment Rate = FCF Growth Rate / ROE
```
Determine the FCF Fraction of Earnings: The remaining portion of earnings that represents free cash flow:
```
FCF Fraction = 1 - Reinvestment Rate
```
Calculate Value: Use the FCF Yield derived in step 1 to value the FCF fraction of earnings:
```
Value = (Earnings * FCF Fraction) / FCF Yield
```
Or expressed as an implied P/E multiple:
```
Implied P/E = (1 - Reinvestment Rate) / FCF Yield
```

Related notes