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Strategies & Market Trends : Contrarian Investing
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To: bruwin who wrote (85)9/13/2006 6:10:26 PM
From: jsabelko  Read Replies (1) of 4080
 
Bruwin, i agree completely with you on the book value and particularly the carrying value of some assets and goodwill which often complicates this number. However as far as your comments on enterprise value I do not follow. As your final statement you say you prefer to target markers that are indicative of a companies current ability to make ongoing profits. Well I agree 100% with this and this is precisely why I've selected EV/ebitda as my primary criteria. Based on your statement you seem to think of EV as the "theoretical" takeover value and yes this is correct but it can also be thought of as the value the open market is currently placing on the ongoing business. Hence by taking the EV/ebitda you are evaluating how the market is valuing the company's ongoing ability to generate ebitda. If this ratio is low the market is placing a low value on the company's ability to make ongoing profits or in this case more precisely ongoing ebitda. Either the market believes the ebitda will not be sustained by the ongoing business or the market should correct the ratio upward by increasing market cap (ie it should be a good investment). Not meaning to be argumentative, just want to make sure I understand your dislike for EV based ratios (ie EV/ebitda, EV/cash flow) for evaluation. I agree ROIC, ROCE are also valid but to evaluate how efficiently the company is operating/using capital. I'm honestly not that concerned if a company is not that efficient as long as the market is undervaluing it's current efficiency/ability to generate money. I'm investing generally with a 1-2 year average hold time in mind.

thanks,
joby
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