>An Essential Questionaire

The sign up page for http://www.valueinvestorclub.com has a very concise set of questions every fundamental investor should try to answer for his stock picks.

http://www.valueinvestorclub.com/value2/signup.asp

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
=>Price/Earnings
Every body in this world knows what PE is, so lets look at other stuff.

=>Forward P/E
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

(market capitalization plus interest bearing debt plus preferred stock minus excess cash

This measure is used when trying to compare companies with different debt levels.

What we get to know is inverse of ROIC or how much a company returns when compared to total capital in the hand of management. I consider this a very important criteria when trying to compare companies.
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.

=>TEV/(EBITDA-maintenance cap/ex)
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.

This is often used as a way to measure how much cash a company generates to cover interest expense.

Amortization is often a legitimate add back to earnings when trying to determine a company's cash generating ability.

However, adding back depreciation to cash flow is only valid when considered in conjunction with the amount of capital spending (a cash outlay) necessary to sustain the current business (see maintenance cap/ex).

Therefore, EBITDA minus maintenance cap/ex is a more accurate way of arriving at cash generated to cover interest expense.

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.

Capital spending necessary for growth is not included in this number. This number is usually not disclosed and must be estimated based on information available through the company or other means.

Using EBITDA as a cash flow measure without subtracting the capital expenditures necessary to keep the business running at the current level will always overstate a company's cash generating ability. The cash outlay of maintenance cap/ex can be higher or lower than the non-cash depreciation charge.

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.

Capital spending for growth should usually not penalize the analysis of current cash flows because the benefits of that spending will not be seen until a future time and did not influence the current year's earnings. It is the analyst's job to determine whether the return from new capital spending for future growth will be adequate to justify the amount of spending.

=>Return on Equity and/or Assets

=>Price/Book

=>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.

=>TEV/Sales

Some other things one should also keep in mind are

• 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,
  =>expected sale/merger,
  =>spin-off,
  =>split-off,
  =>restructuring,
  =>large buyback,
  =>product introduction,
  =>management change, or other.
  =>Sometimes no catalyst is identifiable, but value discrepancy is too large to ignore.
  

Note: when i stop posting such things then you should know that i have digested value investing fully...