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Financial Modelling, Cash flow modelling and valuation
nipper
post Posted: Sep 7 2018, 04:23 PM
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So true, Mick (that crowd sadly in the "unreconstructed, unreconstructed" basket, alongside, analogues to virtue-signalling self-loathing luvvies).

As all hope is lost, we must move on. [somehow we must make enough money to outrun the taxman that redistributes to those rabbits]

So we come to a strong dislike
QUOTE
.. another sign that investors should monitor is the rate of non-recurring writedowns and impairments, which have become almost typical in company accounts.

Institutional investors hate the argument from companies that these non-cash items have no impact on investors.

Matt Williams, portfolio manager at Airle Funds Management, says it is wrong to say that a company taking an impairment on the goodwill attached to a business bought in the past has no impact on investors' cash – there was cash originally outlaid for the business, and the impairment shows that some of that cash was wasted.

Morgan Stanley analyst Tom Kierath has done a neat piece of work to show just how typical these writedowns had become. In the universe of 16 consumer stocks he covers, 13 took one-time items during reporting season. Of the three that didn't – Woolworths, JB Hi-Fi and casino group Sky City – Woolworths took more than $4 billion of charges in the 2016 financial year.

Looking back over the last five reporting seasons, Kierath found that at Metcash, non-recurring items accounted for a staggering 98 per cent of normalised net profit after tax.

At Woolies, one-offs accounted for 33 per cent of NPAT, while even market darling Treasury Wine Estates has reported non-recurring items equivalent to 32 per cent of NPAT.

"The relatively high frequency of non-recurring items implies lower underlying growth in our view," Kierath said.




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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
lgrif
post Posted: Sep 6 2018, 04:27 PM
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In Reply To: mullokintyre's post @ Sep 6 2018, 12:43 PM

Spot on.


Said 'Thanks' for this post: nipper  
 
mullokintyre
post Posted: Sep 6 2018, 12:43 PM
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In Reply To: Mags's post @ Sep 6 2018, 09:00 AM

Well, the reason I asked was because of THIS ARTICLE.

And in particular this graph



The rest of the article is the usual ABC economic illiteracy.
Because gross Profit has gone up by 13%, and wages have gone up by only 2.1%. therefore its unfair.
Would love to see the net profit versus wages growth shown, but that doesn't support the narrative.
The only surprise is that it wasn't written by Alberici.

Mick




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Mags
post Posted: Sep 6 2018, 09:00 AM
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In Reply To: nipper's post @ Sep 5 2018, 09:36 PM

Yep, Nippers answer looks about right. I don't know why people get hung up on 'gross' profit, especially given it excludes massive variables including labour.

For example an up class restaurant, with massive margins on food eg. a $10 steak being sold at $80, will have a great gross profit.

But the net profit (ie. bankable) will be smashed due to expensive chefs, waiters, welcoming staff, and advertising and fitout costs/renewals.

I've heard, the small business world, saying such as 'value is 4X gross profit', in which case most small, labour based businesses are worth millions.... Good luck ever getting anyone to pay those millions.

I'd rather focus on net profit, gross is interesting, but not a real key input for me.

 
nipper
post Posted: Sep 5 2018, 09:36 PM
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In Reply To: nipper's post @ Sep 5 2018, 09:28 PM

QUOTE
Gross profit margin and operating profit margin are two metrics used to measure a company's profitability. The difference between them is that gross profit margin only figures in the direct costs involved in production, while operating profit margin includes operating expenses like overhead. Both metrics are important in assessing the financial health of a company.

Gross Profit Margin
Gross profit margin shows the percentage of revenue after subtracting the cost of goods sold involved in production. The cost of goods sold is the amount it costs a company to produce the goods or services that it sells. Gross margin shows how well a company generates revenue from the direct costs like direct labor and direct materials involved in producing their products and services.

Read more: How do gross profit margin and operating profit margin differ? | Investopedia https://www.investopedia.com/ask/answers/01...p#ixzz5QE62mtNM




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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne

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nipper
post Posted: Sep 5 2018, 09:28 PM
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In Reply To: mullokintyre's post @ Sep 5 2018, 09:18 PM

No, but Charley Munger probably refers to it as " bullsh*t numbers"



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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 


mullokintyre
post Posted: Sep 5 2018, 09:18 PM
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Does any of the well read folk who inhabit these forums, know what the term Gross Operating Profit means?
I have come across the term on the ABS website, but am not sure what it means.
There is Gross Profit, operating Profit, Net Profit, EBITDA etc, but never heard of Gross Operating Profit.
Thanks in Anticipation.
Mick



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sent from my Olivetti Typewriter.
 
nipper
post Posted: Mar 27 2018, 03:46 PM
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QUOTE
Dr Neil Constable, head of equities at GMO, is trying to make sure the stock picking decisions reflect the actual economics of the businesses. For the last three years, Constable and his team have been involved in a project to bring the financial accounts of listed companies into the modern era.

"The accounting standards haven't kept up with what is going on in the real economy, and in terms of how corporates are conducting their financing," says Constable, who has a PhD in physics and a masters in mathematics.

The issue in a world where algorithms are picking stocks in a systematic fashion is that they're relying on accounting data to do so. But that information is being presented using frameworks that reflect an industrial capital intensive age. And over decades, measures such as book value have deviated so far from economic reality that they've been rendered nonsensical.

"How many companies have negative book value? There's a lot of them – firms like Colgate Palmolive, Philip Morris and McDonald's," he says. "In a strict sense, it means you are insolvent. But McDonald's has a $160 billion of market capitalisation that begs to differ."

Constable says accounting standards mean that as these companies have spent money on advertising, investing in their brands, it's been expensed rather than capitalised, so their assets have effectively been understated. That, in turn, distorts financial metrics such as return on capital.

The same applies to drug companies that have spent billions of "R&D" dollars trying to come up with a blockbuster drug, or technology companies that have developed patents with no tangible accounting assets to show the value they have created.

By contrast, there are companies that have spent billions on acquisitions (often value destructive) which accumulates on the balance sheet as assets, and (an increasing trend of late) companies that reduce their book value through share buybacks.

Over time this trend, coupled with a broader shift in which more mega cap companies are "asset-light", has made accounting measures far less meaningful. So GMO, which manages $70 billion, has decided to fix the problem to better differentiate quality companies.

Constable says the project at GMO has involved "completely reworking the income statements and balance sheets" of virtually every company ever listed. "All the broad data is there – the amount they have spent on R&D and advertising. In some sense, it's just misclassified."

What he found was that their own "economic" or adjusted measure of book value was 95 per cent correlated to the accounting book value of companies in the 1970s. "That meant there was no point doing that analysis – GAAP or IFRS accounting more or less captured what was going on in industrial companies."

But today GMO's proprietary measure of book value has a correlation of just 55 to 60 per cent to the reported accounts, demonstrating the enormous deviation. "I can't say if we are right, but we are different."

Ironically, Constable says, the accounts of emerging market companies that may lack the governance standards of Western firms better reflect their economic reality. That's because their accounts haven't been contaminated by buy backs and mergers.

Nothing captures the essence of this research than the debate over Amazon. The "most controversial stock in the world" has divided not only the investment community but the value investing community, given it makes little profit, and trades on an apparently exorbitant price to earnings ratio of 300 times.

"Fundamental investors that like Amazon talk about it as a company that 'invests through its income statement'," says Constable. "A lot of the things that GAAP accounting rules force to go through the income statement, like R&D and its investment in Amazon Prime, they [investors] say those are investments. So GAAP says it goes through the income statement but the fundamental guys don't care – they look through that."

Chinese tech stocks like Tencent and Alibaba are equally divisive especially among accounting wonks, with Alibaba's numbers coming under particular scrutiny. Constable says once the adjustments are made Amazon is indeed expensive but Tencent and Alibaba were about fair value relative to the market. "What the model is are saying is that once we have made these adjustments its actually conceivable you could own these stocks. That's terrifying for a value investor."

On the flipside is an old tech stock – IBM. By virtue of its low tangible book value, IBM has an impressive return on equity of 65 per cent. But Constable says this is explained by its tendency to buy back shares and the fact that it has a large amount of patents, which aren't captured on the balance sheet. Despite the high ROE, Constable says his adjustments would suggest its ROE is just 9 per cent, slightly below the 10 per cent market return. "Which given what IBM shares have actually done in the last 20 years, it seems right."

Constable isn't claiming to have unearthed new investing insights, and but he is attempting to systematically capture what shrewd stock pickers know intuitively. "A fundamental investor isn't fooled by the [accounts]," he says.

But the same cannot be said of a computer, or an algorithm designed to blindly invest in quality or value companies based on rules derived from the reported accounts. "They really just take book value as reported on the balance sheet, and reported net income. It completely misses the underlying economics of some of these companies"

For this reason that Constable says the trend towards "factor-based" investing (sometimes referred to as "smart beta") may lead too much capital astray. "This factor stuff is doomed which is funny thing to say given it's growing like a weed. But it is bound to disappoint in terms of returns. The pendulum has swung too far and in that direction. "Maybe there will be a bit of a reckoning. But this industry is weird. Nonsense can persist for a lot longer than you think it should."

Read more: http://www.afr.com/markets/gmos-dr-neil-co...f#ixzz5AvQ4E4yE



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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne

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Tylergold
post Posted: Dec 11 2010, 10:01 PM
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Everyne on the FORUM, i need to solve this issue with DCF.
We can all agree that higher ROE is usually a better business all other things being equal ok.

So if we look at the worser business SEE ATTACHMENT

Ok on a DCF the worser business will be worth more than the better business.

Theses are only profit figures and we should be using Owners earnings (profit+depr/amor-capex required to maintain unit volume)
Is their a correlation between capex & ROE, does a lower ROE = more maintenance capex therefore less owners earnings and a lesser valuation????
http://www.oldschoolvalue.com/valuation-me...-owner-earnings


Or Am i wrong??


Thanks
Tyler
Attached File(s)
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Smartman_plc
post Posted: Dec 21 2005, 07:56 PM
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QUOTE (theflasherman @ Monday 05/12/05 12:07pm)

I would have thought that the standard deviations would apply to deviation from a trend. If I am understanding what David has written, it seems that the standard deviation he is refering to is from an average price over some period of time.

For a stock that is steadily rising in nearly a linear manner, the standard deviation from the average price of that stock over the time period is high. However, the standard deviation from the linear trend line for that period is low.

Of course, one's trading perspective needs to be considered. Volatility in a stock that is trending up over a long time period is far less of a concern to a long term investor than to the short term trader.



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Cheers,
Smartman
 
 


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