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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.



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