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Gene, there is a problem with your analysis. The "reinvestment" results in depereciation, which is an expense which reduces earnings. So, if both companies earn $5, company B's $5 earnings are AFTER the reinvestment. In other words, to continue your example, company A earned $5 with no reinvestment, company B really earned $7, but reinvested $2, resulting in $2 of depreciation expense that reduced its reported earnings to $5. Given this, the conclusion that company B is worth less is much less clear, and possibly not even the case (if the company is able to accelerate depreciation so that it is faster than "real" depreciation, thus leaving it with assets whose REAL VALUE is greater than their BOOK VALUE). |
