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FROM THE FOUNDER
Growth vs. profitability
Balancing growth and profitability is essential for long-term value creation and success in AEC firm valuation strategies.
I have often complained here and elsewhere about those financial “experts” who only want to use historic EBIT as the basis for determining value in an AEC firm. I think it shows a real naivety to just look at EBIT. It makes sense in some cases. But it doesn’t make sense in all cases. Where it makes sense is when you have a flat or low growth company that consistently spits out profits. High growth companies are a completely different matter.
Mark Zweig
I was part of a discussion recently with a very successful, big-time investment banker in the course of helping two companies work together for a potential merger, and had a chance to ask him some questions about this. He had a simple answer. If the firm’s growth rate is less than 20 percent, multiples of EBIT as a basis of value make sense. Once the growth rate exceeds 20 percent, that goes out the window. I have always liked to use 30 percent as a target for combined growth rate and profitability, and have written about that in these pages in the past. Any company that can do that or better year-over-year will blow the lid off any traditional valuation multiples. The public market reflects what I am talking about. Look at how long it took Amazon to be profitable yet they had incredible value. Why? Revenue growth rate.
Plain and simple. And this is just one of hundreds or thousands of companies that were not profitable yet had stocks that were highly valued. Don’t get me wrong. I’m not saying profits aren’t important. Businesses have to make a profit at some point or there is something fundamentally wrong with them. But at the same time, growth is where the real value creation occurs and where the real opportunity lies for investors. I’m an owner and board member in a company that is not in the AEC business. I am also on their valuation subcommittee. We set the value of the stock each year that governs all stock transactions. This year, we
See MARK ZWEIG , page 6
THE ZWEIG LETTER JANUARY 13, 2025, ISSUE 1568
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