- Cash Conversion Cycle (CCC)
- CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
- It measure of management effectiveness on cash management. How efficiently the business turn cash over. The lower the better.
- CCC is a relative number. It need to compare with historical average and competitor's figure to determine whether it’s good or not.
- CCC with decreasing trend is peferable.
- Need to be cautious with bing increase - possible cash shortage and inventory issues.
- Cash Return on Invested Capital (CROIC)
- CROIC = FCF / Invested Capital
- Invested Capital = Shareholders Equity + Interest Bearing Debt + Short Term Debt + Long Term Debt
- The numerator can interchange with owner earnings - depending on the company and situation.
- CROIC is a lumpy figure and it is not going to be flat line. We need to look for some levels of consistency.
- CROIC > 13% consistently is a sign of moat - mean FCF is +ve and the business is a strong performer in the industry.
- EV/EBIT
- EV/EBIT = Enterprise Value / Earning before Interest and Tax
- Buffett’s rule of thumb is to pay 10x pretax when acquiring businesses.
- FCF to Sales
- FCF to Sales = FCF / Sales
- What percentage of sales is converted directly to FCF. - The higher the better
- Any company hash FCF to Sales > 10% is a FCF generating machine.
- FCF to Short Term Debt
- Whether the company can cover it’s short term debt with FCF. Not by borrowing or diluting, but with internally generated funds.
- < 1, the company doesn't generate enough FCF to cover its debt. If the ratio consistently < 1, there is a high change of trouble.
- > 1, the debt can be covered without borrow more.
- Inventory Turnover
- Inventory Turnover = COGS / Average Inventory
- Measure how quickly company sell it inventory
- The goal is to quickly turn inventory into cash, then reinvest the cash back into inventory, and then turn it to cash again for even more profits.
- Compare inventory turn over with similiar companies.
- High inventory turnover can be achieved via
- Tight inventory management (excellent)
- Reducing price to quicky sell (bad)
- Magic Formula Yield
- Magic Formula Yield = EBIT/EV
- It can be used to compare against earnings of another stock, sector or the whole market and even bond yields.
- A relative valuation to use it with reference.
- Look for EY >= 10%
- Piotroski Score
- It is a quality score that leads to an easier valuation.
- The first four criteria of the Piotroski Score count towards profitability.
- Points 5-7 of the Piotroski Score, looks at the health of the balance sheet in terms of debt and the number of shares outstanding.
- The last two factors of the Piotroski Score looks at operating efficiency.
- Positive net income compared to last year
- Positive operating cash flow in the current year
- Higher return on assets (ROA) in the current period compared to the ROA in the previous year
- Cash flow from operations greater than Net Income
- Lower ratio of long term debt to in the current period compared value in the previous year
- Higher current ratio this year compared to the previous year
- No new shares were issued in the last year
- A higher gross margin compared to the previous year
- A higher asset turnover ratio compared to the previous year
- How to use?
- Look for trends. Increasing? or Decreasing?
- Price to Intrinsic Value
- This one is tricky. How to get intrinsic value?
- Intrinsic value can be caculated via DCF, Graham Net Net, Graham Growth Value, Katsenelson's Absolute P/E, EV/EBIT, etc...
- The idea behind using a price to intrinsic value ratio is to invest in the most undervalued stock. If you have 10 stocks - how do you know which one to buy? Go for the one with lowest ratio
- DuPont model for ROE
- 3 step formula or 5 step formula
- ROE is a way to measure the effectiveness of management. Now you can see in which area management is exceeding or lacking.
- To find which element to blame if ROE not perform well.
Portfolio Update November 2024
15 minutes ago
