New ratios preview (ROIC, WACC, and more)

yuvaltaylor
Sun, 15 Feb 2026 05:55:39 +0000

marco:

Correct. GPT read all the papers that have empirical results. That's what matters.

How do you know? Did you ask it what specific papers use the book value of equity to calculate WACC? Did it give you papers that actually exist? You have to prompt these LLMs well in order to get answers that make sense. I asked Claude Sonnet who uses book value of equity when calculating WACC and it couldn't come up with anyone. Maybe it's wrong, maybe ChatGPT knows something Claude Sonnet doesn't. But assuming that GPT read all the papers and spat out the result is a very bad idea.

marco:

P123 is not for accounting classes or valuation classes. P123 wants to provide a library of factors that have high IC cross sectionally, relative to each other. Factors that do well in ranking systems as well as ML.

I like this a lot, but factors have to make sense in addition to testing well. For example, NetInc/EV might test better than NetInc/MktCap but only one of them is correct. Similarly levered free cash flow to enterprise value may test better than unlevered free cash flow to enterprise value, but only one is correct.

Accounting standards exist for a reason. These standards can be codified through GAAP or IFRS or they can be widely accepted by practitioners and used in industries. I know people who calculate these ratios for a living. There are hundreds of thousands, maybe millions of them. If P123 introduces incorrect ways of calculating them, nobody is going to respect P123. Especially not the professionals who are asking you for these factors.

On the other hand, maybe that's better for me. If the masses of P123 users use incorrect formulas, that gives me an edge. So maybe I should just shut up.