Hi Raymond - doesn't work all that well ACROSS sectors
as an evaluation tool, but has explanation value for sectors. One Example would airline stocks - the debt side is much larger than the market cap, and explains the low price /sales numbers.
For High Tech, It might be -
Market Cap - Cash divided by cash flow
Of course, many high tech companies have negative cash flow, a 'burn rate' frequent criteria is how many quarters do they have before cash hits zero ? Barron's had a famous article on this about a year ago.
Sometimes in the same sector, you will see one company with debt and the other with a pile of cash. Then you need to dig deeper - sometimes the company with debt is growing fast, and the company with cash is selling market share and being a cash cow.
This criteria is most useful when comparing commodity type producers & regulated industrties - oil and gas, minning, telecom, utilities. We can probably include personal computers (Dell, Gateway, HP etc. but not Apple) as a commodity also. For the commodities, the products and markets tend to be simmilar, costs tend to be simmilar, and financial structure has a big influence on results.
Kurt Wulff at www.mcdep.com uses it to do an evaluation of energy companies. |
