If it has a nagative net worth, then it simply makes it an even bigger EARNINGS play because if you count the goodwill as worthless, then you also have to remove the amortization of that goodwill from the income statement.
First, I don't calculate net worth by using the traditional retained earnings divided by number of shares formula. Retained earnings is a fictitious number as far as I'm concerned, you can't get it back in a liquidation.
Second, when I calculate FCF I adjust for all none cash amounts, and I said in a previous post that CLHB is FCF positive, so I don't think we disagree there.
Third, it doesn't matter how profitable they appear to be now, if they can't re-fund that $50M by the time it comes due in May, they will be forced into defaulting and/or bankruptcy. I don't know what their prospects for re-funding are, so I decide to wait and see.
Fourth, negative net worth is always an issue for a value investor. Otherwise, where's the value? While I agree that a positive net revenue stream has value, as far as I'm concerned that value first has to be applied to getting out of the hole before having any net positive affect for me as a shareholder.
Fifth, my valuation technique for NetNet does not totally disregard the value of goodwill, or any other asset deemed to be a long term asset. I do, however, discount all LT assets by 50%. Graham suggested PPE be discounted by 85%, in this kind of market, the value of Goodwill has taken drops of up to 95% for many endeavors. I am a bit more liberal than Graham because I believe most PPE is already significantly discounted through the accumulated depreciation and 50% will probably get me close enough to an approximation.
I believe in some instances,goodwill & the amortization therefrom, masks the underlying earnings power.
The problem is always one of trying to accurately quantify "real" earnings. The key, I believe, lies in the analysis of the cash flow. The question for me was: "How much money could a company take off the table and not hurt the business?" For me, the answer is Free Cash Flow.
I haven't yet looked at ROSD.
Timba |
