Growth : Rectifying Two Common Mistakes

The paper discusses two issues related to “growth”. Both have arguably not been dealt with adequately in the literature. The first concerns growth and accruals. Research practice combines two components of accruals, asset accruals and liability accruals. This simplification causes problems because income-increasing asset accruals correlate positively with growth whereas the opposite holds for income-increasing liability accruals and growth. In light of this reality, the paper re-configures Jones's model. The second issue addresses forward P/E multiples dependence on future growth in expected eps. It is shown that the textbook Gordon-Williams 1/(r-g) approach makes no sense – even as a crude first cut. An alternative modelling, which is based on very straightforward ideas, sets the stage and following the preliminaries the P/E-multiple is shown to depend on the growth in expected earnings, Y2 vs. Y1. This approach avoids the need for a g-parameter a la Gordon-Williams. The development brings out a similar g-parameter dependency in the residual income model (when P = bv + RI/(r-g)) and the Ohlson-Jeuttner (2005) model; both include a 1/(r-g) type of multiplier