Valuations ex-cash

[scorpioncapital]

I see lots of valuations ex-cash but it seems this is more a measure of management aggressiveness. After all, do we deduct huge amounts per share if the company has large net debt?

 

Wouldn't it be better to just add some fudge factor for what you think is the flexibility of having excess cash or deducting some factor for the risk of excess debt? If so, how would you determine this variable?

 

I found this article -

http://blog.alphaarchitect.com/2012/05/22/do-cash-adjusted-pe-ratios-work/#gs.vD2wKHw

 

[Hielko]

Why do you think people use EV/EBIT(DA)? Because cash and debt is important!

[JayGatsby]

Do people discount debt in their valuations? If I invest tomorrow and they dividend all the cash, tomorrow that cash is worth 80c. If they don't dividend it they might instead waste it on a bad acquisition or possibly reinvest it in a great acquisition. Curious how others think about this... there's a few microcaps that on a strict EV/EBITDA basis are very cheap because they're sitting on large piles of cash. If you discount this cash the valuation is more in line with what you'd expect.

[DeepSouth]

Do people discount debt in their valuations? If I invest tomorrow and they dividend all the cash, tomorrow that cash is worth 80c. If they don't dividend it they might instead waste it on a bad acquisition or possibly reinvest it in a great acquisition. Curious how others think about this... there's a few microcaps that on a strict EV/EBITDA basis are very cheap because they're sitting on large piles of cash. If you discount this cash the valuation is more in line with what you'd expect.

 

That's really the point of being a corporate securities analyst. A computer can buy a basket of cheap EV/EBITDA stocks. Is management a good steward of that excess cash or not? Does the company have an internal runway for capital deployment at reasonable ROIC? Is management considering returning cash to shareholders? Has management proven themselves to be good acquirers? Figure out what's likely to happen, and try to leave a margin of safety for a downside event path. Cash should be severely discounted at some companies with poor managers and a few managers (at least in hindsight) deserve premiums on their balance sheet cash due to their cap allocation skill.

[scorpioncapital]

I discount both debt and too much cash, my thought being that a good management is steering a ship, too defensive or too offensive are both problematic. But obviously you can discount debt more than cash if you feel like it. If I discount the debt, I'll add back something for the quality of the asset. I think this type of synthesis can't be numerically evaluated. Once you've done all this, it translates into bet sizing, when to trim, how much to trim, when to add, how much to add.

You know that game with the little silver ball and you have to wiggle it around to get it through the maze? I feel it's the same. Inflation favours the debtors but if valuations sink because they were too high , cash favours the 'new' buyers. It's just a never ending dynamic game. I still think what Fischer said in his books is the best, if a good management is running a good business, unless the valuation is overtly crazy or you find something better, you can resist taking the final point- which may turn out was just the beginning of a bright future.