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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Stock Farmer who wrote (43594)	6/17/2001 5:46:47 PM
From: Thomas Mercer-Hursh	Read Replies (1) of 54805

It's easy. Open an excel spreadsheet. Label the first row "revenue", the second row "gross margin", the third row earnings, the fourth row "cash flow". Populate with this year's data. Extrapolate in a first pass by using whatever growth rate you think is useful for the next 20 years. Convince yourself that each columns numbers "make sense". If not, adjust. Presto. You have the basis for a cash flow estimate. In many domains I am inclined to this kind of modeling behavior rather than simple metrics, particularly when derives the figures from explicate assumptions and does some sensitivity analysis and back checks. It is very hard for me to see how one would think otherwise than that such models were far superior to any simple ratios, but the problem, of course, is that the models are far more complex, not nearly as easily conveyed, and often require some actual understanding of the business, product, and market to evaluate. So, I guess it isn't too surprising that a lot of people stick to simple ratios.

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