EBITDA is just an approximation to cash flow. There is good reason why EBITDA was used because interest and capex can be tax deductable.
Put in another way, does it make sense to you that as EV increase can be negative due to debt? If a good business is trading 20% discount to intrinsic value, it is worth a look. But the same business levered up 1X hence doubling the EV, would it be interesting to look at it at 20% discount to EV?
But it makes a lot of sense to LBO because they are not looking to enhance equity, they are looking to further increase EV by piling up more debt to engineer ROE or payoff the LBO owners first. Basically EV/ EBITDA is a quick measure of how much more debt can it absorb. And history tells us many times they overestimated
(05-03-2015, 08:42 PM)newborn1000 Wrote: [ -> ]oh maybe I remember wrongly......I think my phasing was poor also
I was just trying to point out that unless the cash is returned to shareholders, doing a valuation base on cash balance dont make sense to me
just my opinion =)
If u look at the Asset-Business-structure perspective, the business is churning out good cash. But unless u have access to the cash via dividend or mgt control, the structure is a cash drag that impact investors OWN cash flow return on invested capital (hence our discussion above) as the capital enlarges. Or you trust the management to deploy the cash wisely ie track record
Even a pure cash listco usually trades around 10-20% discount to cash for good reasons as it continues to pay expense, future and current. If mgt is not reliable you can be sure of rising OPEX going forward
EV EBITDA does not say anything about how much a company can be levered, if one business is 7x and one business is 10x that doesnt mean the latter can support more leverage. What it tells you is how much value the market as a whole is placing on the business.
What Buffet talks about is essentially EV / EBITDA less maintenance capex, which is the best multiple to use by far but unfortunately unobservable because distinguishing between growth and maintenance capex is really hard.
What LBO buyers use to assess leverage capacity is primarily DSCR (debt service coverage ratio), secondly interest coverage (ebitda / interest) and as a limiting factoor debt to EV. Debt / EBITDA is a crosscheck as to total size of leverage package but this could range anywhere from like 2.5-5x+ depending on the cash flow characteristics of the business.
(05-03-2015, 11:44 PM)roxhockey Wrote: [ -> ]EV EBITDA does not say anything about how much a company can be levered, if one business is 7x and one business is 10x that doesnt mean the latter can support more leverage. What it tells you is how much value the market as a whole is placing on the business.
So if a stock's market cap is $100m without debt then loading it with $100m debt the value of the business is now $200m?
EV/EBITDA of 7X vs a similar business of 10X means the former like has more capacity to lever up, not the other way round. The fastest way for LBO to generate cashflow for themselves is to cut capex, which is detrimental to the health of the business. Not only for maintenance capex but expansion capex that helps to sustain competitiveness.
Another article:
http://www.forbes.com/sites/brentbeshore...arnings/2/
Cashflow characteristics is right. Ratios are just a pale quick and easy way to first cut/ filter. It's meaningless to say i have strong debt ratios but i can only pay ½ my debt due today and the other ½ only 3 months later as funds are used for capex or working capital. Ask the commodities companies. CFOs have to manage the cashflows, ratios are only indication, they cannot be "eaten"
IMHO value investors should continue to "eat" the operating, financing and investing cashflows that gives much clearer picture. Both 1000-999 and 2-1 are equal to 1. Details are lost when oversimplify
In your example the EV would not increase. Drawing down debt and putting the money in the bank would not increase net debt. EV remains the same. If the company goes and puts the money into something eg a new factory then yes the EV would increase. But the company would also have more productive assets.
Your 7x and 10x conclusion is also not right, generally companies that trade at higher multiples can support more debt because the cashflow characteristics that cause them to trade at higher multiples also support higher levels of debt. The other factor is that banks will feel more comfortable if theres more equity behind them in the capital structure.
I agree with your views on cashflow but think your discounting of ev ebitda is off...ev / ebitda less maintenance capex (or rather op fcf less maintenance capex, but ebitda is a proxy here) is the most pure way to look at asset values. From there you need to consider the capital structure that sits against that and what filters down to the equity you hold...going straight to a PE multiple misses a lot of this nuance, and given thr market focuses on PE most of the obviois PE undervaluation is already taken out of the market. But taking a more detailed look can uncover some gems.
That said, if like in Valuetronics case the mgmt considers cash to be a working capital item and has no intention to give it to you, you cant deduct the cash off.
Hence why, as i think youve said before, you need to look at structure and management, not just the business / assets.
I stand corrected on the EV example as you said. I meant to say that the company will be levered and cash paid off to the LBO owner. You can actually see this in action in FNN takeover and what transpired past 2 years, including all the generous capital reduction and debt. Charoen would have been looking at EV/ EBITDA
To say higher multiples is better is to say higher PE is better. Both LBO and us are looking at value, albeit in different way
Indeed the banks will be looking at the equity backing. When you buy a stock do you look at the equities/ book value growth, or do you look at the equities and debt growth? If you look into the history of EV/ EBITDA during the days of junkbond 80s, you will know why the ratio makes sense to Milken and likes, but will make very little sense to OPMI
Just curious if any one still vested in Valuetronics ? Last week there were slight selling so I managed to add more @ 0.405 !
I am back in for some months........waiting for their ICE segment to develop further still
(20-12-2015, 06:26 PM)newborn1000 Wrote: [ -> ]I am back in for some months........waiting for their ICE segment to develop further still
After reading from TheEdge - Investing Ideas - Small Caps - Aug 24 2015 - Innovalues, AP Oil, Valuetronics and China Sunsine Top Picks of KGI's Tay - I have invested and traded and invested again whenever the prices dipped back to the current prices - 0.40 - 0.405
And I plan to hold it for their ( Est ) Dividend Yield ( % ) 7.9
Despite the benefits drop, the transition is accelerating and the cash flow pops up.
Now with 85% of the market in cold hard cash, I wish they increase the buy-backs.
Overall i like the new company profile more : higher margins, no debt, EV tending to zero and a big dividend.
Best risk profile in SGX
(03-02-2016, 09:03 AM)noah2013 Wrote: [ -> ]Despite the benefits drop, the transition is accelerating and the cash flow pops up.
Now with 85% of the market in cold hard cash, I wish they increase the buy-backs.
Overall i like the new company profile more : higher margins, no debt, EV tending to zero and a big dividend.
Best risk profile in SGX
Hi noah, I did a back of envelope calculation . May I ask y u say EV tending to zero?