The 2nd leg of our 3E strategy is buying efficient companies at an Efficient Price.
Even for the highest quality companies, there will be a valuation at which they are no longer attractive investments which is why it's important that we don't end up paying inefficient prices for our wonderful HexaShield-tested efficient businesses. We understand that our universe of companies will always be more expensive than the rest of the market and we are willing to pay that premium for the quality but we constantly remind ourselves of trying to avoid paying too large a premium. This is important because we want our companies to invest for growth and not refrain from making growth expenditures.
We try to value companies based on a metric we refer to as the adjusted free cash flow yield. The adjusted free cash flow yield is derived by computing the free cash flow to equity shareholders but after adding Capex like revenue expenditures (like R&D, advertising, technology costs) and capital expenditures which are not needed to maintain the business.
We compare this adjusted free cash flow yield (the free cash flow as a percentage of the company’s market value) across the universe of listed peers in local/global markets and also to other asset classes like bonds and we will only buy when we believe that the relative yield is reasonable vis-a-vis the rest of the comparative universe.
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