022 DCF Alternative Reinvested Capital - DCF Model vs Reinvested Capital Model - Stock Picking

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00:00 Intro

00:22 Quick DCF model overview

02:03 DCF alternatives that are not CAPM related

05:00 The DCF alternative is: reinvested capital

08:36 DCF alternative: assumptions and adjustments

11:12 Where is the money going?

14:04 Summing up reinvested capital model as a DCF alternative

The reinvested capital model is meant to be used in growth companies, such as FAANG stocks.

Reinvested capital model is a DCF alternative for companies that reinvest into their business, so it doesn’t make sense to use with companies that aren’t expected to grow. It uses returns on capital, so by definition it penalizes companies with lots of debt and cash (some people don’t throw cash into ROC, I conservatively do). It favours companies that reinvest back into the business.

I love it because reinvesting profits for growth is my favourite capital allocation option. It is riskier for an investor than to distribute it, but more rewarding if the company has a long-term competitive advantage. An exception to this is reinvesting heavily into non-core businesses.

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