CONFIDENTIAL INVESTMENT REVIEW
INTRODUCTION
Our approach to the evaluation of companies quoted or otherwise is based on thorough analysis and research. We reflect actual performance but adjusted for certain smoothing techniques used by providers of information *. We set standards for profitability, cost structures, net debt, cash flow and growth. The essentials are:
Profitability
The system zeros into Operating Profit or EBIT (Earnings before interest
and tax) to test the viability of performance.
Structural
The fixed costs of a business in terms of people and expenses have to be
at a certain level in terms of sales in order that a business can operate
as a going concern. A high Break Even point to sales in times of a recession
or industry down turn leads in most cases to profit warnings leading
to announcements of staff reductions.
Cash Flow/Net Debt
The level of high net debt is a warning to investors and watchers of company
performance.
A lack of attention to levels of Working Capital incites management to
increase short term borrowing. By having a positive Free Cash Flow (operating
profit less capital expenditure and where appropriate acquisitions of companies)
on a regular annual basis that cash becomes available to pay for dividends
and to expand both organically and by acquisition, thus avoiding to borrow
for these purposes.
Growth Index
This index measures the number of times the investment in subsidiaries
purchased by a Group plus the amount of Goodwill at the date of a Balance
Sheet is covered by Equity less Goodwill plus Net Debt. If the index
is below ONE it indicates that profitability has been low, cash has been
used for share Buy-Backs, excessive dividends. This index reveals if
management is growing the business or shrinking it.
Performance Grades represent the following:
A - Good profitability, positive cash flow, low or no debt, good growth index (over 1.5)
B - Good profitability, positive cash flow but high debt
C - Average profitability, negative cash flow, Share Buy –Backs, high debt
D - Negative profit and cash flow and high debt
* Reflections for The Unsuspecting Shareholder CHF15- published by Amerac Publishing which explains these techniques. Order using contact form.