The Tale of the Value Ratio

Once upon a time, there was a wise old professor who loved teaching young entrepreneurs about how companies create value. One day, he gathered his students and said:

“If you want to understand whether a company is truly worth investing in, you need to look at something I call the Value Ratio. It tells you how much value a company is creating compared to the money that has been put into it.”

The students leaned in, curious.

Breaking the Value Ratio into Two Friends

The professor drew two characters on the board:

1. ROCE – Return on Capital Employed – a hardworking farmer who shows how much crop he can grow from the land he already owns.

2. P/E – the Price-to-Earnings ratio – a fortune teller who predicts how much people believe the farmer’s harvest will grow in the future.

“Together,” the professor explained, “ROCE × P/E gives us the (simplified) Value Ratio. One looks backward at how efficiently money was used in the past, and the other looks forward to how bright the future might be.”

ROCE: The Farmer’s Report Card

The professor continued:

“Imagine a farmer who has invested in seeds, tools, and land over the years. ROCE shows how much crop (earnings) he produces for every dollar of land and tools (capital) he owns.

• A farmer with 12% ROCE is doing about average – that means for every $100 invested in the past, the land produces $12 in earnings on average for each subsequent year.

• If ROCE climbs to 15% or more, this farmer is outstanding – he’s squeezing more out of his land than most others.

But beware! If the farmer starts selling his land and tools and has almost nothing left, his ROCE will shoot up artificially. That doesn’t mean he’s suddenly become more efficient – it means he’s running down the business!”

P/E: The Fortune Teller

“Now,” the professor said, “let’s meet P/E, the fortune teller.

P/E tells us how many years’ worth of earnings investors are willing to pay for today.

• If P/E is around  14, that means investors believe the farmer will keep producing good crops for years to come.

• If it rises to 25 or 30, they expect extraordinary future harvests.

On average, across markets, P/E sits around 20, showing that investors usually expect companies to grow somewhat rather than just stay the same.”

Putting the Friends Together

The professor smiled. “Now let’s multiply them:

• A typical farmer (company) with ROCE = 12% and P/E = 14 gives us a Value Ratio of 1.7. That’s roughly in the healthy range.

• A farmer who can both grow crops efficiently and convince investors he’ll keep growing gets a much higher score.”

He then gave examples from the real world:

• ExxonMobil: ROCE 10%, P/E 15 → Value Ratio ~1.5. Solid, steady farmer.

• Chevron: ROCE 8.8%, P/E 23 → Value Ratio ~2.0. Investors believe Chevron’s future fields will be fertile and harvests will grow, even if today’s efficiency is a bit lower.

When the Tech Wizards Arrive

Then came the tech companies – wizards who seemed to turn gold out of thin air.

• Microsoft: ROCE ~30%, P/E 36 → Value Ratio ~11.

• Apple: ROCE ~67%, P/E 34 → Value Ratio ~23.

• Amazon: ROCE ~17%, P/E 34 → Value Ratio ~6.

The professor laughed:

“Compared to the energy farmers, these tech wizards are operating on a completely different scale. Apple, for example, generates phenomenal returns on every dollar invested – without needing too much extra land or tools. That’s why its Value Ratio towers above the rest.”

The Moral of the Story

Finally, the professor summed it up:

• ROCE shows how efficiently a company is working today.

• P/E shows how much belief the market has in tomorrow.

• Together, they form the Value Ratio – a mirror reflecting both past performance and future promise.

A high Value Ratio means:
👉 The company works efficiently today and inspires confidence in its growth tomorrow.

The students left the classroom nodding, now able to see businesses not just as numbers, but as farmers, fortune tellers, and sometimes even wizards shaping the future.