Problem with calculating price to earning ratio?

RandomInvestor · 10 October 2016

galumay said:
Well, its part of the story, you need to look at things like change in working capital, changes in borrowings and other bits and pieces, depending on the model you choose.

Perhaps its time to tell us whether you are planning to start investing in the share market, or doing some sort of study? Then we can recommend some relevant reading material to suit your needs.

Of course, Though I won't be doing individual stock picking end of this year, seems like so much to investigate. I get the feeling so matter how many annual reports, balance sheets, income statements, cash flow statements etc I read that I won't be able to find the intrinsic value.

Here is what I do so far, or my plan, read the companies annual report from when it start to date, read company's balance sheet looking that total assets are well above total liabilities, that there is a high return on equity, high return on assets, look for a p/e that is relatively low if the share price is low(though I think this part is wrong), I look at the net income to see if it's increasing every year. That's what I do so far, your opinion? Also I read income/cash flow statements looking for similar things.

luutzu · 10 October 2016

RandomInvestor said:
Wait a second calculating intrinsic value is related to the earnings a company makes each year and you need to figure out how much it will be earning? So if a company earns 20m every year, you can make the assumption that they will keep doing for a few years and you can come up with a value on the share price it self?

Earning is not always the reported earnings. As Galumay and others have said, businesses do have bad year/s and the earnings from financial performance statements can be manipulated.

Say they reduce the price or offer special deals, claim the increase in revenues and book the profit, but then the earnigs and the profit may have yet come in, and may not come in if their customers/clients are bad enough and the company's credit policy is loose enough.

So when you work out its earnings, a more accurate term would be its "earning power". How much does the company really earn for its shareholders - in real cash.

So yes, look at the cash flow statement; focus on its operating cash inflow. See where the company get its cash and what they do with it. Ideally, the company's net operating cash should be big enough to cover both its financing and investing activities...

----
Back to valuation though. I just work out the earning power, work out its historical earnings growth averages, look to its possible growth pipeline and come to a few scenario of its likely earning power and its likely growth rate over the next 7 to 10 years... then use Graham's rough estimate formula I can have a very good idea of what's the fair value of the business would be.

Others wouldn't do that and would do a series of detailed Discounted Cash Flow modelling. Not wanting to get into that debate again, in short I just don't find that to be useful. It's too much guess work about too many future and unpredictable events - all to just get a precise figure that you really shouldn't use anyway because as an invesetor, you're not out there to work out the precise value of a business so that you would pay at that precision.

Since you would want to pay as far below that fair value as possible, a rough estimate is good enough for me.

----

Let's flog my value investing software shall we... www.danginvestor.com

Free for private users... it's designed to systematically analyse and value any business for you. Just enter the financial statements.

First will go through the financial position analysis; then financial performance... there are other modules to analyse management and corporate policies etc., but you can stop there and go onto its valuation module.

All ratios are worked out, charted and arranged in sequence I think company analysis should be taken.

The valuation module include scenario planning, have calculators to value and chart the results... all with the ratios and averages worked out on a table right in front of you.

It's quite involved. But shouldn't take more than an hours to enter the frontpage financials for 10 years once you get used to it.

But yea, use the standard free results from google or yahoo or commsec to narrow the search.. but once you think you've found the company, I don't think anyone ought to use those free databases to make investment decision.

So an investor could either open the annual reports, do their own calculations with pen and paper or excel.. .or use danginvestor.

luutzu · 10 October 2016

RandomInvestor said:
Of course, Though I won't be doing individual stock picking end of this year, seems like so much to investigate. I get the feeling so matter how many annual reports, balance sheets, income statements, cash flow statements etc I read that I won't be able to find the intrinsic value.

Here is what I do so far, or my plan, read the companies annual report from when it start to date, read company's balance sheet looking that total assets are well above total liabilities, that there is a high return on equity, high return on assets, look for a p/e that is relatively low if the share price is low(though I think this part is wrong), I look at the net income to see if it's increasing every year. That's what I do so far, your opinion? Also I read income/cash flow statements looking for similar things.

Also pay great attention to its Retained Earnings and Contributed Equity figures.

If you want a safe, established and quality company, this is where you find it.

A company can talk about all the growth and the margin it wants to, if it's been operating for a while but its retained earnings are bad while its contributed equity just keep on rising... it's a bad business.

Take APA pipeline; or ABC learning centre... compare them to WalMart or BNSF etc. It's just day and night.
btw, APA is going to crash soon.

More here, me little blog: http://blog.danginvestor.com.au/signs-great-business/

RandomInvestor · 10 October 2016

luutzu said:
Earning is not always the reported earnings. As Galumay and others have said, businesses do have bad year/s and the earnings from financial performance statements can be manipulated.

Say they reduce the price or offer special deals, claim the increase in revenues and book the profit, but then the earnigs and the profit may have yet come in, and may not come in if their customers/clients are bad enough and the company's credit policy is loose enough.

So when you work out its earnings, a more accurate term would be its "earning power". How much does the company really earn for its shareholders - in real cash.

So yes, look at the cash flow statement; focus on its operating cash inflow. See where the company get its cash and what they do with it. Ideally, the company's net operating cash should be big enough to cover both its financing and investing activities...

----
Back to valuation though. I just work out the earning power, work out its historical earnings growth averages, look to its possible growth pipeline and come to a few scenario of its likely earning power and its likely growth rate over the next 7 to 10 years... then use Graham's rough estimate formula I can have a very good idea of what's the fair value of the business would be.

Others wouldn't do that and would do a series of detailed Discounted Cash Flow modelling. Not wanting to get into that debate again, in short I just don't find that to be useful. It's too much guess work about too many future and unpredictable events - all to just get a precise figure that you really shouldn't use anyway because as an invesetor, you're not out there to work out the precise value of a business so that you would pay at that precision.

Since you would want to pay as far below that fair value as possible, a rough estimate is good enough for me.

----

Let's flog my value investing software shall we... www.danginvestor.com

Free for private users... it's designed to systematically analyse and value any business for you. Just enter the financial statements.

First will go through the financial position analysis; then financial performance... there are other modules to analyse management and corporate policies etc., but you can stop there and go onto its valuation module.

All ratios are worked out, charted and arranged in sequence I think company analysis should be taken.

The valuation module include scenario planning, have calculators to value and chart the results... all with the ratios and averages worked out on a table right in front of you.

It's quite involved. But shouldn't take more than an hours to enter the frontpage financials for 10 years once you get used to it.

But yea, use the standard free results from google or yahoo or commsec to narrow the search.. but once you think you've found the company, I don't think anyone ought to use those free databases to make investment decision.

So an investor could either open the annual reports, do their own calculations with pen and paper or excel.. .or use danginvestor.

Man value investing is really difficult lol, knew it was but I keep getting slammed with more and more things I need to consider, though still gonna give it my all. I know earnings are manipulated, you are referring to the balance sheet and that right? How do I find the real statistics? And how come alot of different websites which show balance sheets for a company have different results? Which is the most reliable source?

luutzu · 10 October 2016

RandomInvestor said:
Man value investing is really difficult lol, knew it was but I keep getting slammed with more and more things I need to consider, though still gonna give it my all. I know earnings are manipulated, you are referring to the balance sheet and that right? How do I find the real statistics? And how come alot of different websites which show balance sheets for a company have different results? Which is the most reliable source?

I haven't compare the actual annual reports against the figures from data vendors so I wouldn't know which is more reliable. In general, they tend to be quite accurate.

Problem I often find is they can be outdated. And the further away from the last reported date, the more likely it is that the reported figures have since changed. So new share issues, new development in the business, new results in the halfyearly that's not updated... So best to take a look at the original source yourself.

Data from vendors, even the high-priced ones, are at best basic summaries. Their ratios are standard stuff and their definition may be different to what this or other would define.

There's only two or three vendors anyway, all others buy theirs from them and recut it.
So depends on your budget and approach, the old fashion pen and paper could just be all you need.

-----------

Stock investing approach depends on how you view stocks. If it's just a stock to buy low and sell high, then you can do TA or combine TA with some fundamental and macro stuff.

If view as a ownership in a business, you would approach it as you would an owner of that business.

And to understand the business properly is not easy. To know it to the extend that you're confident in your judgment when the market thought otherwise... that need a lot of work and understanding.

Can't do it overnight, can't get it right all the time, but you gotta start somewhere.

luutzu · 10 October 2016

RandomInvestor said:
Man value investing is really difficult lol, knew it was but I keep getting slammed with more and more things I need to consider, though still gonna give it my all. I know earnings are manipulated, you are referring to the balance sheet and that right? How do I find the real statistics? And how come alot of different websites which show balance sheets for a company have different results? Which is the most reliable source?

Earnings manipulation aren't really shown the income/financial statement itself. It's manipulated in the policy and management leeway in interpretating and forecasting stuff.

So that's why galumay and others will tell you to also look at the cash flow statement, see its cash. Cash is harder to manipulate since it simply state what cash move in and out, for what activity.

So if you look at Asaleo Care, there's a bunch of bs about their earnings and debt and borrowings and contributed equity in the two years before IPO. But the cash statement show something isn't right. The borrowings they said were loan and so returned didn't make it to the cash account.

McLovin · 10 October 2016

luutzu said:
So if you look at Asaleo Care, there's a bunch of bs about their earnings and debt and borrowings and contributed equity in the two years before IPO. But the cash statement show something isn't right. The borrowings they said were loan and so returned didn't make it to the cash account.

What does this paragraph mean? Especially the bit I bolded.

luutzu · 10 October 2016

McLovin said:
What does this paragraph mean?

It mean Asaleo is the new Dick Smith.

Maybe next week when I have time, I'll analyse its 2014 and 2015 account just to put all doubt to rest... but having studied its accounts of 2012 and 2013, PEP is worst than Anchorage on DickSmith.

http://blog.danginvestor.com.au/analysis-asaleo-care-ltd-asx-ahy/

galumay · 11 October 2016

luutzu said:
It mean Asaleo is the new Dick Smith.

I think what McLovin is asking, is what does the bolded part of the quote mean. The sentence makes no sense at all, could you please re-read it and then try to clarify what you are trying to say?

luutzu · 11 October 2016

galumay said:
I think what McLovin is asking, is what does the bolded part of the quote mean. The sentence makes no sense at all, could you please re-read it and then try to clarify what you are trying to say?

Detailed in the link provided.

But in summary, what Asaleo claims to be borrowings and contributed equity - as stated in the income and position statements - were not shown in the cash flow statement.

So the $250m, or whatever it was, that they claimed were contributed to Asaleo by PEP and SCA (the parent company of Asaleo before PEP came in) - that figure never arrive into Asaleo's cash account.

Further, the $235m PEP and SCA claims were debt from related party, that they must return back... that too never came into the cash flow account.

The only cash that came into Asaleo's were the $125m redeemable pref.shares at 15% coupon that PEP lent; and also the $240m [?] loan from the banks.

The bank loan were used to "repay" that $235m "debt to related parties" - something that never came in as cash in the first place; the rest, and then some, were to be paid by new shareholders at the IPO.

It's just as bad as Anchorage on DickSmith - but on a bigger scale.

I know, there's the $100m share buyback they're extending; a couple of directors buying back shares. So it must be a bargain. It's just all game play.

craft · 11 October 2016

luutzu said:
So an investor could either open the annual reports, do their own calculations with pen and paper or excel.. .or use danginvestor.

Hey Luutzu you are unique.

software to organise and visualise data for those that like to collect their own during the understanding and verify stage is a pretty good idea, but if your posts on analysis and alike are marketing attempts...... Can't say I'm inspired to take a look at the software - More the reverse.

But I admire the entrepreneurial spirit.

Ves · 11 October 2016

luutzu said:
But in summary, what Asaleo claims to be borrowings and contributed equity - as stated in the income and position statements - were not shown in the cash flow statement.

Because they weren't cash transactions.

PEP contributed its share of the AUS/NZ business (if I recall) valued at about $72m in exchange for shares and a further $24m in promissory notes receivable.

SCA contributed the rest of the AUS/NZ business valued at $114m. As you mentioned there were also some expenses paid on behalf of the new entity by SCA.

The $125m in preference shares issued to PEP are on the cash flow statement.

See the first few pages here for details.

http://www.asx.com.au/asxpdf/20140626/pdf/42qggp874c9qlz.pdf

PEP had previously bought a 50% share of the AUS/NZ from SCA as part of a previous joint venture. If you're looking for the cash it'll be in the bank account of the head SCA entity.

luutzu · 11 October 2016

craft said:
Hey Luutzu you are unique.

software to organise and visualise data for those that like to collect their own during the understanding and verify stage is a pretty good idea, but if your posts on analysis and alike are marketing attempts...... Can't say I'm inspired to take a look at the software - More the reverse.

But I admire the entrepreneurial spirit.

It's free, so I'm not making any money from private investor and those who want to learn about investing.

Though I did start out thinking that I could charge retail investors too... but it seem that most investors are not used to reading financial statement or want to get in-depth understanding of the business. That and who am I that they ought to listen to. So I guess they would rather get their data sourced from the big data vendors.

That and, I just figured this out, there might not be that many value investors out there.

So the efforts and resources to market to retail investors for the kind of return a small number of value investors... I don't think can pay the power bills.

So focus is on the boutique fund manager/professional analyst type. Where they can buy the raw data feed from whoever and I can cut it to their liking. Combine that with DangInvestor's financial and managerial analysis modules, sharing research across the firm, standardising their firm's own research approach... some fund manager might see value in that.

DangInvestor's various modules there are how I am doing my own research into companies. So they're free because I need friends more than I do money - well I need money too, just friends tend to be easier to get than money.

----------

In terms of sales and marketing with these posts...

Take Asaleo. You don't need my app to know it's bs.
But most investors reading Asaleo's research on Morningstar won't know Asaleo's bs at all. I know because I read those ratios on Commsec and thought there could be a bargain in Asaleo.

But without being forced to enter the financial data, and in doing it you have to read the notes. It became clear very quickly that it ain't what it appear.

But yea, I might actually do a full financial analysis on Asaleo, compare it to DickSmith, and nail those PEP guys to the wall. Then move onto APA and blew it up too. That would be good marketing.

luutzu · 11 October 2016

Ves said:
Because they weren't cash transactions.

PEP contributed its share of the AUS/NZ business (if I recall) valued at about $72m in exchange for shares and a further $24m in promissory notes receivable.

SCA contributed the rest of the AUS/NZ business valued at $114m. As you mentioned there were also some expenses paid on behalf of the new entity by SCA.

The $125m in preference shares issued to PEP are on the cash flow statement.

See the first few pages here for details.

http://www.asx.com.au/asxpdf/20140626/pdf/42qggp874c9qlz.pdf

PEP had previously bought a 50% share of the AUS/NZ from SCA as part of a previous joint venture. If you're looking for the cash it'll be in the bank account of the head SCA entity.

I've looked at the timeline very carefully before. It doesn't add up.

They issued new shares to both PEP and SCA after forming Asaleo - January 2, then on the 4th for PEP, 2012.

The two didn't get in bed together before 2011... so whatever transactions they did in terms of contributed equity and JV etc., the cash must still be in the consolidated statement of cash flow for 2011. The cash isn't there.

But while no cash from Con.Equity came in, all the cash that they borrowed from the banks, the $125m from pref. shares issued all came in and clearly shown.

But cash that goes out to repay and return capital, are also shown

That and it doesn't make any sense that SCA would put any of their own cash in; nor PEP to put any new cash in beside that $125m they've loaned. I mean they should have put the cash in like they claim, but it never came in, and why in the world would it came in when PEP is already putting $125m at risk into a loss making business.

craft · 11 October 2016

luutzu said:
It's free, so I'm not making any money from private investor and those who want to learn about investing.

Though I did start out thinking that I could charge retail investors too... but it seem that most investors are not used to reading financial statement or want to get in-depth understanding of the business. That and who am I that they ought to listen to. So I guess they would rather get their data sourced from the big data vendors.

That and, I just figured this out, there might not be that many value investors out there.

So the efforts and resources to market to retail investors for the kind of return a small number of value investors... I don't think can pay the power bills.

So focus is on the boutique fund manager/professional analyst type. Where they can buy the raw data feed from whoever and I can cut it to their liking. Combine that with DangInvestor's financial and managerial analysis modules, sharing research across the firm, standardising their firm's own research approach... some fund manager might see value in that.

DangInvestor's various modules there are how I am doing my own research into companies. So they're free because I need friends more than I do money - well I need money too, just friends tend to be easier to get than money.

----------

In terms of sales and marketing with these posts...

Take Asaleo. You don't need my app to know it's bs.
But most investors reading Asaleo's research on Morningstar won't know Asaleo's bs at all. I know because I read those ratios on Commsec and thought there could be a bargain in Asaleo.

But without being forced to enter the financial data, and in doing it you have to read the notes. It became clear very quickly that it ain't what it appear.

But yea, I might actually do a full financial analysis on Asaleo, compare it to DickSmith, and nail those PEP guys to the wall. Then move onto APA and blew it up too. That would be good marketing.

Maybe your posts are showing that you have no idea and putting people off??????? nah that wouldn't be it.!!!!

McLovin · 11 October 2016

luutzu said:
I've looked at the timeline very carefully before. It doesn't add up.

They issued new shares to both PEP and SCA after forming Asaleo - January 2, then on the 4th for PEP, 2012.

The two didn't get in bed together before 2011... so whatever transactions they did in terms of contributed equity and JV etc., the cash must still be in the consolidated statement of cash flow for 2011. The cash isn't there.

But while no cash from Con.Equity came in, all the cash that they borrowed from the banks, the $125m from pref. shares issued all came in and clearly shown.

But cash that goes out to repay and return capital, are also shown

That and it doesn't make any sense that SCA would put any of their own cash in; nor PEP to put any new cash in beside that $125m they've loaned. I mean they should have put the cash in like they claim, but it never came in, and why in the world would it came in when PEP is already putting $125m at risk into a loss making business.

The contributed equity wasn't in the form of cash it was a contribution of assets. Like every other week on the ASX when a company launches a takeover for another company using its own shares.

luutzu · 11 October 2016

McLovin said:
The contributed equity wasn't in the form of cash it was a contribution of assets. Like every other week on the ASX when a company launches a takeover for another company using its own shares.

SCA's assets were also paid for, in real cash.

So yea, these contributed equity were made up, out of thin air.

There's $250m to you bro.

Bro: can I get my $50m back now mate, I need it.

Sure, take them... the new investors will see we've "put in" the $250, now $200m anyway. And we'll sell them for $,1000,000,000 Australian dollars. ha ha ha

It's a good game to play if you can get away with it, I guess.

luutzu · 11 October 2016

craft said:
Maybe your posts are showing that you have no idea and putting people off??????? nah that wouldn't be it.!!!!

Yea, not kissing azz tend to put people off.

Maybe I don't know anything about high finance, but I know I won't be buying Asaleo while very smart people managing people's money are pouring other people's lifesavings into it like it's not their money to lose.

I guess SCA is holding its 36%, management is buying back the stocks, and also spending up to $100k of their hard earn cash from the $31m they gave themselves at IPO... what could be wrong with Asaleo.

McLovin · 11 October 2016

luutzu said:
SCA's assets were also paid for, in real cash.

So yea, these contributed equity were made up, out of thin air.

There's $250m to you bro.

Bro: can I get my $50m back now mate, I need it.

Sure, take them... the new investors will see we've "put in" the $250, now $200m anyway. And we'll sell them for $,1000,000,000 Australian dollars. ha ha ha

It's a good game to play if you can get away with it, I guess.

You've really got no idea. I just hope you don't lead any newbies astray with this rubbish.

Have a look at VOC cash flow statement and contributed equity. Contributed equity increased by $2955m, but in the cash flow statement cash from equity raisings was only $1m.

luutzu · 11 October 2016

McLovin said:
You've really got no idea. I just hope you don't lead any newbies astray with this rubbish.

Have a look at VOC cash flow statement and contributed equity. Contributed equity increased by $2955m, but in the cash flow statement cash from equity raisings was only $1m.

So no real cash came in from the contributed equity, but the cash is there? Because they agreed that they've put in equity, they've put in cash?

What am I missing?

Is that different from reported earnings where the cash ain't coming? It's worst because pepends on the business, delayed earnings you may at least could gain some if you send the lawyers out... when your fellow shareholders say they put in equity but you both know there aint no cash attached, it's collusion to rip the other shareholders off.

---------

Investing isn't rocket science mate. And I'm not offering some "secret" and magical formula to lure or trick people. Just a simple calculator where those who care for one can use to help with their own research and decide for themselves.

But yea, I don't know what I'm talking about because I'm not smart enough to see how in the hell private equity could put in $125m for 15% interest, work their magic and in less than 3 years flog Asaleo off for almost $1Billion real Australian dollars.

Yea, nothing's wrong with paying $1b for a lost making business that's been "turnaround" by financial experts in under 2 years - and have $20m to show how awesome their work has been.

Problem with calculating price to earning ratio?

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