How To Use Our Values
The values that are calculated for each company are based on the publicly filed financial statements with the regulatory body for companies that are publicly traded, the Securities and Exchange Commission. Because of this, we believe that the financial statements that we use to derive our valuation calculations are the most accurate as possible. In a nutshell, we use three different valuation techniques to assess the net worth of a business. The techniques are used to analyze the company in various ways such as the current state of the business (CAV, BV), the long term prospects of the business (EV) and the average return to the investor (GR). Listed below in order of importance are the valuation techniques that we use to asses investment decisions for any business.
Current Asset Value – CAV
The Current Asset Value is used to assess the current state of the business. We believe that using this value as a gauge for any investment decision is crucial and mandatory. This valuation assesses the current state of the business by looking at a worst case scenario for the company. When companies have a strong Current Asset Value, it speaks volumes on how the company will survive in hard economic times such as the current climate that we are experiencing. Cash is king for any company in any situation, especially if the company has stumbled upon hard times. Having a large ratio of cash to total debt is always good to have regardless of the industry the business participates in, and it should never be overlooked in an investment decision. A company that doesn’t overextend itself and rely on leverage to derive income streams reflects on the solid financial management of the business by its managers and positions itself to prosper in the long run.
Book Value – BV
The Book Value is also used to assess the current state of the business but in a different way than the Current Asset Value. This value takes into account all of the assets of the company and compares it to the total debt. For the most part, this value should only be used to assess companies in certain industries which contain a large amount of investments on their balance sheet (particularly insurance companies) which are liquid like cash but don’t fall under current assets.
Intrinsic Value – IV
The Earnings Value is used to assess the long term prospects of the business by looking at the cash streams that have and will be generated by the company. Although income can fluctuate greatly from quarter to quarter and year to year, looking at the financial performance of the average cash streams over the last five years can give some insight on how strong a business is. The ability to consistently produce large income streams of cash is what makes a strong business. This, in combination with a high Current Asset value, is how good businesses turn into great businesses. Your job as the investor is to ensure that your money is parked with a company that can consistently grow, meet expectations and generate streams of income again and again.
Growth Rate - GR
The growth rate is used to assess the average rate of return that the business has returned to the investor over the last five years. We believe by taking a five year snapshot of the company’s Book Value growth rate, it can provide an accurate account of how the company treats shareholders. Since Owner’s Equity is what shareholders actually own, we only look at the growth rate in the book value to assess the return to an investor (not sales growth or income growth like Wall Street likes to put so much emphasis on). Companies that put a premium on adding to the bottom line and keeping the earnings in the hands of investors have the interest of the business owner’s at heart. Managers that make this a priority and consistently have a high growth rate are doing an exceptional job at managing the business. This is an important factor in assessing the true worth of a company since managers are responsible for the success of the business and can be the difference between success and failure.