- The point of this exercise was to figure out the right price to pay today for returns you hope to get in the future
- These two variables, ROCE and reinvestment, tell you how companies compound earnings by generating higher returns over their cost of capital (investments) and putting a part of the profits back into the business to keep growing
- Here’s how this works: a 20 per cent ROCE on `100 crore of capital means `20 crore in operating profit. If the company reinvests half of this profit, its capital base expands to `110 crore. Maintain the same ROCE and next year’s profits rise to `22 crore, pushing earnings forward by 10 per cent.
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