Before I start to drill down into how a market ECC can be used to translate company FCF yields (operating) into growth ratings, I thought a few parting shots at the PE merchants was in order. If you're seriously trying to explain equity valuations on the basis of reported earnings please consider the following 7 charts relating to the broader market (FT Allshare).
FT Allshare PE multiple was progressively de-rated from 2000-2008
Despite an acceleration in relative earnings growth (vs GDP) over the same period
How much of this acceleration was a function of increased financial leverage however?
Which saw debt as a % of EV more than double
More of this earnings meanwhile was being absorbed by additional investment
Which reduced to conversion of earnings into FCF
Which presents a somewhat less rosy picture on current valuations
Source: Thomson Reuters (Worldscope)
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