Avoiding Common Stumbling Blocks 227was trading for a P/E of 12 may now command a P/E of 15, leading
to a stock price of $ 30 versus $ 24. This reasoning is not based on any
formula, but it does point to another reason why value investors love
growth - at - a - reasonable price investment opportunities.
The question then becomes: What determines a reasonable
price for the growth? What value or parameters determine whether
the investor is paying a reasonable or an unreasonable price? No
defi nitive answer or formula determines whether the price paid for
the future growth of a company is reasonable or not. The issue of
whether the price paid is reasonable is more effectively answered
when the question is inverted.How Will the Growth Be Achieved?
Understanding how a company plans to grow its business and prof-
its into the future is useful before attempting to invest in a business
for growth. The options here are clear: A business can grow inter-
nally or by acquisition. While there is no ultimate preference for
which way a business grows, of importance to the investor is what
the business will require to achieve its desired growth. The best
businesses are those that can support their future growth primarily
by cash fl ows generated by the business, thus minimizing reliance
on the credit of others. The prudent use of debt can be advanta-
geous, but businesses that are prone to rely on the teat of a loan
offi cer may fi nd themselves in an unpleasant situation if the well
runs dry. 2 An understanding of a business ’ s fi nancing ability is of
extreme importance to an investor and of extreme signifi cance to
how the market will perceive, and ultimately value, a business. The
ability to fi nance its growth needs internally suggests that the busi-
ness is generating healthy levels of cash fl ow. This in turn implies
that the business is operating soundly. That in turn suggests that
most likely the business is in the hands of capable management. AllCH011.indd 227CH011.indd 227 9/2/09 11:51:52 AM9/2/09 11:51:52 AM