The Growth Appreciation Period (GAP) is the number of years that a company will earn returns on invested capital (ROIC) that are greater than the weighted average cost of capital (WACC) on new investments.
The Growth Appreciation Period (GAP) is the number of years that a company will earn returns on invested capital (ROIC) that are greater than the weighted average cost of capital (WACC) on new investments. After the GAP, there is no incremental value creation and ROIC equals WACC on all new investments.
For example, a stock with a 75-year GAP means the market expects the company to grow profits for 75 years. Such high expectations for future growth would earn a Very Dangerous for the GAP criterion in our Stock Rating Methodology.
Our approach to valuation focuses on quantifying the market's future cash flow expectations embedded in securities prices rather than making our own predictions on future cash flows. We prefer to be a critic of Mr. Market as a fortuneteller for future cash flows than be a fortuneteller ourselves.This white paper and video explain exactly how our reverse discounted cash flow (DCF) valuation models work, and how our clients use them to get the best insight possible into the future cash flow implications of their target prices and market prices.
We also like to point out that our reverse DCF models do not require us to be accurate forecasters. As long as we project a reasonable extrapolation of past performance, our models will always give us discreet insight into the market’s expectations for future cash flows and how those expectations compare to past performance.
Once armed with accurate information on the expectations embedded in stock prices, investors can make prudent decisions about the valuation of securities.
The education section of our website has a page on GAP with more details.