It takes long time to get the fundamental appraisal methods to sink into one DNA's...
but I hope if it sinks deep once it should remain embeded for a long time.
a few lines with some added thoughts from the same page
=>Value Investing does not necessarily require or imply that a stock must be selling at a low P/E or a low Price/Book ratio (although such opportunities may make fine investments).
=>Excellent companies selling at a discount to their intrinsic value may also qualify as "value" investments irrespective of current P/E, Price/Book or similar ratios (e.g. the notion of value as articulated by Buffett).
Some measures of Valuation
Every body in this world knows what PE is, so lets look at other stuff.
Same as PE with the difference that, one would try to imagine how the PE would look 1 year ahead.
=>Total Enterprise Value ("TEV")/EBIT
Total Enterprise Value -is defined as
EBIT is earnings before Interest and Taxes. and thus
Analyzing TEV/EBIT is a shorthand way of looking at the multiple of total "cost" of the company (market price of equity plus assumed debt) to the pre-tax cash flow generated by that company.
we can enhance of this ratio to find TEV/(EBITDA-maintenance cap/ex) which further accurately reflects the true valuation.
EBITDA (Earnings before interest, taxes, depreciation and amortizatio)
Why use EBITDA? since we got to add back the non-cash expenses associated with depreciation and amortization to EBIT.
Maintenance cap/ex- this is a figure that represents the amount of capital spending necessary to "sustain" a company's current level of sales and earnings.
thus TEV/(EBITDA minus maintenance cap-x) is sometimes a better way to determine the multiple of total "cost" of the company (market price of equity plus assumed debt) to the pre-tax cash flow generated by that company.
=>Return on Equity and/or Assets
=>Price/Free Cash Flow
Free Cash Flow - this figure represents cash available to shareholders before changes in working capital. It is computed by taking the net income, adding back depreciation and amortization and subtracting maintenance cap/ex.
- Normalized earnings and/or free cash flow if different than current
- Future growth rates of sales, earnings and/or free cash flow
- Relative value to similar companies
- Private market value
- Break-up analysis
- Asset valuation
- Heavy insider ownership,
- Recent open market transactions,
- Special option grants or
- Other evidence of extraordinary management incentives should be noted.
- Whats are the Catalyst
CATALYST - should explain what action, event, situation or future realization will cause the market to recognize the value discrepancy that you observe.
Examples could include an
=>impending regulatory/legal change,
=>management change, or other.
=>Sometimes no catalyst is identifiable, but value discrepancy is too large to ignore.