Hi Steven - These are all very good fundamental base line criteria. I would like to add a few more and futher quantify others, especially what makes up book value.
First, to add to other base line criteria, I calculate free flow cash flow and see how this number has changed over the life of the company and how it measures up for the industry in general. As you know, free flow cash flow is a measure of liquidity and cash generating power. It is usually calculated by subtracting out all current expenses (ie. payroll, marketing etc), current debt expenses, and all other direct expenses. You do not deduct depreciation as this is a book entry.
In any investment I always want a positive free flow cash flow and would like to see this number grow at the same rate as overall industry growth.
Second, in the analysis of book value assets, it is important to look at the asset types that comprise the calculated book value. Many times you have to adjust this number higher or lower depending on the quality and current appraisal of the assets recorded on the balance sheet. For example, real estate is booked at cost rather than market. If the real estate assets are over valued or undervalued compared to the current market, you need to adjust these figures accordingly. Another asset that needs to be adjusted are equity investments. Many times equity investments are carried on the books at cost or at times marked to current market value only once a year. If a company has a lot of equity investments and joint ventures, you must adjust book value to reflect the current market for the equity investment. Many times these investments may not be liquid and should be adjusted to reflect the liquidity of the asset too.
To summarize, the criteria you show above are good baseline measures but a more detailed investigation of the balance sheet and income statement should be reviewed. Now that much of this information can be obtained through the company 10K report and from the company directly, an adjusted book value of company assets is very easy to determine. As an investor, you must ask the right questions.
My favorite pick for 1997 based on this fundamental evaluation criteria is Novell. Book value is $6, stock price is $ 9 1/2. Indusrty growth is 20% and earnings growth is estimated to be 18%-25% growth for next two years. Novell has a market share of the industry of 65% which may shrink to 50% but they still dominate their industry.
The kicker in my determination that Novell is undervalued is that the free flow cash flow has always been positive over the life of the company. The most current numbers are $1.71 per share for 1996 and $1.40 per share for 1995. The company has zero debt and $4.00 in cash. The other assets include an additional $0.50/share in equity investments and another $0.10/share in real estate assets which are carried on the books at cost. The market value of the real estate has doubled over the last six year period and the equity investments have more than doubled in the last two years.
Finally, the majority of book value assets as measured in the balance sheet are highly liquid and/or undervalued when marked to current market valuations.
The negative....no CEO....eaisly resolved.
EKS |
