Questions to answer before evaluating a company?
Vantage points for Evaluating a Company
Insights into Fundoo professors speech about Vantage point which talks about eight different views for evaluating a stock.
He tells about the evaluation of stock of a company in a very simple way so that even a layman can understand.The basic idea behind his speech is that we should acquire the skill of looking at problems to solve or evaluate from different view points. This is easier said than done. But from his speech we could learn how to evaluate and recognize good companies from the bad. Not only that we can know how a value investor should wear the lens of different people with different viewpoints so that he could make a decision which is fail-safe.
1. View point of an Business Analyst:
An Analyst's main concern is to find great businesses. He does so by finding if the company is capital intensive.A great business should uses less of fixed assets to generate more revenue, have no interest bearing debt and have allocated its surplus capital in safe investments. He explains about the hidden moat in the negative working capital which is due to the excess of customers money in its books on which the company has to pay no interest.
The capital turnover ratio tells us how much return can we get on capital invested if we set a certain profit margin. A business can afford to have low margins and still earn high return of capital if it asset turnover is high. So one may find great business having low margins. This according to me is good finding as normally we might think that if the company earns a very low margin of say 5%, it is not good business. But what we miss is the return on capital invested which should be the main focus. We can find this by dividing the revenue by the total profit excluding other incomes which us the profit margin. Then multiplying this figure with the capital asset turnover would give us the return on capital.
2. View point of a Banker
A banker would like to evaluate how much he could lend to a worthy company. He would fix interest cover of three times the cash flow provided the business is stable. The loan amount would be less if the business is cyclic as the would expect an interest cover of more than 3 times.
3. View point of a Value Investor
A value investor would like to buy bits or whole of business whose share price trades on or below the value which is the sum of the value the banker would like to loan the company and the cash equivalents. This he see as a margin of safety for his investment. This part more important as we come to arrive at a fair value by finding the per share value of the total bankers loan added to the cash equivalent.
4. View point of a Bond manager
5. View point of a Leverage buyout buyer
6. View point of propronents of effecient market theory.
7. View point of value fund manager
8. View point of Society:
Society has a long term view of the effect of a business on its people and their well being. What is good for the shareholders might not be good for the society.
- What are the competitive advantages for the company? Does that advantage convert well as a moat around the company? Is it the leader in its industry? What is the product or service contributing to the company's success? Who are its competitors?
- Who is the major shareholder and what percent does she own? Is there buyback plan? Does the company buyback its share are a price with sensible value? How is the earnings being deployed?
- Is the company capital intensive? What is the Debt to Equity Ratio?
- What is the Tangible Return of Equity? What is the average return of equity?
- Compare the inventory turnover with its competitors?
Vantage points for Evaluating a Company
Insights into Fundoo professors speech about Vantage point which talks about eight different views for evaluating a stock.
He tells about the evaluation of stock of a company in a very simple way so that even a layman can understand.The basic idea behind his speech is that we should acquire the skill of looking at problems to solve or evaluate from different view points. This is easier said than done. But from his speech we could learn how to evaluate and recognize good companies from the bad. Not only that we can know how a value investor should wear the lens of different people with different viewpoints so that he could make a decision which is fail-safe.
1. View point of an Business Analyst:
An Analyst's main concern is to find great businesses. He does so by finding if the company is capital intensive.A great business should uses less of fixed assets to generate more revenue, have no interest bearing debt and have allocated its surplus capital in safe investments. He explains about the hidden moat in the negative working capital which is due to the excess of customers money in its books on which the company has to pay no interest.
The capital turnover ratio tells us how much return can we get on capital invested if we set a certain profit margin. A business can afford to have low margins and still earn high return of capital if it asset turnover is high. So one may find great business having low margins. This according to me is good finding as normally we might think that if the company earns a very low margin of say 5%, it is not good business. But what we miss is the return on capital invested which should be the main focus. We can find this by dividing the revenue by the total profit excluding other incomes which us the profit margin. Then multiplying this figure with the capital asset turnover would give us the return on capital.
2. View point of a Banker
A banker would like to evaluate how much he could lend to a worthy company. He would fix interest cover of three times the cash flow provided the business is stable. The loan amount would be less if the business is cyclic as the would expect an interest cover of more than 3 times.
3. View point of a Value Investor
A value investor would like to buy bits or whole of business whose share price trades on or below the value which is the sum of the value the banker would like to loan the company and the cash equivalents. This he see as a margin of safety for his investment. This part more important as we come to arrive at a fair value by finding the per share value of the total bankers loan added to the cash equivalent.
4. View point of a Bond manager
5. View point of a Leverage buyout buyer
6. View point of propronents of effecient market theory.
7. View point of value fund manager
8. View point of Society:
Society has a long term view of the effect of a business on its people and their well being. What is good for the shareholders might not be good for the society.
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