The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

by Tobias E. Carlisle

The good business is worth twice (20 percent ÷ 10 percent = 2 times) its assets, for example, 2 × $5 million = $10 million. This is because we get the same return from the long bond by investing twice as much. The bad business earning 5 percent on invested capital is worth half its capital (5 percent ÷ 10 percent = 0.5 times). We calculate it’s worth 0.5 × $20 million = $10 million because we can get the same return from the long bond—$1 million—by investing half as much. Both businesses are worth $10 million. (And both have the same price-to-earnings (PE) multiple: 10 times.) Graham might have preferred the bad business at half its tangible asset value. But Buffett prefers the good business at twice its asset value.