I know the company but I don't follow it very carefully. You don't have to know much about the company to come up with a MCFVS for use as a starting point and this figure doesn't necessarily reflect financial strength or future expectations. It's more of a fire sale base figure. Note that when removing inventory from assets this can dramatically change a company's value. So, depending on the company and how one view's their assets, you might have complete faith that they will collect all their recievables and that the value they have placed on inventory should be used in the calcuation of Franchise Value. I stated that I usually drop these figure because inventory can be written off, just like we have seen time and time again. Another factor in a company like AFCI is the fact that a substantial portion of their assets are CSCO stock. Do we trust the value of this figure? Should it be lower or higher? When calculating an MCFVS, I don't like to include anything that might not be available in a fire sale. What happens to the company's net assets if CSCO's stock gets cut in half over the next quarter? Obviously, the reverse is also possible, that CSCO's stock could double and the company's asset value would increase substantially but I use VERY conservative numbers when applying this ratio.
Here's the numbers I would use when I calculate the ratio for AFCI:
Price $18.25, Shares 84, Rev (80.2 x4)= 321, FV = 588 ( 900 assets - 312 liabilities )
Market cap 1533 - FV 588 = 945 / 321 rev = 2.95 or rounded to 3. MCFVS=3
Now, if you believe that FV should be 1100 - 312 = 788
and not 588, then you can say that the MCFVS should be 2.3
I like this formula because it gives me a starting point and a nice equation that I can play with the factors to see how the ratio will change based on rising revenues, or increased losses, or a number of other factors, like issuing stock or convertibles, etc... |
