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Sample
Ideas
DEFINITIONS
Intrinsic
Value is a critical measure of business
value. We define intrinsic value as the present
value of the future cash flows of a company
discounted at a rate that properly reflects
the time value of the money and the risks associated
with it.
EBIT
is defined as earnings before interest and taxes
and is often called operating earnings. Debt
levels as a percentage of capitalisation are
different among corporations and therefore EBIT
is a good number to look at to calculate the
earning power of the company's business.
TEV
(Total Enterprise Value) is defined
as market capitalization (price times the number
of fully diluted shares outstanding) plus interest
bearing debt plus preferred stock minus surplus
cash. This measure is used when trying to compare
companies with different debt levels.
Surplus
Cash is defined as the cash balance
that is not required for a company’s normal
annual operations. Cash on the balance sheet
must be broken up into cash required for operations
and cash surplus to operations.
TEV/EBIT
is a rough and ready way of looking at the multiple
of total “cost” of the company to
the pre-tax cash flow generated by that company.
EBITDA
is earnings before interest, taxes, depreciation
and amortization. EBITDA adds back the non-cash
expenses associated with depreciation and amortization
to EBIT. This is often used as a way to measure
how much cash a company generates to cover interest
expense. You must provide your analysis of capital
expenditures when using this metric. EBITDA
can only be used to pay for interest after providing
for maintenance cap/ex – the capital expenditures
necessary to sustain a business at the current
levels.
Therefore,
EBITDA minus maintenance cap/ex is a better
measure of arriving at cash generated to cover
interest expense.
Maintenance
cap/ex is a figure that represents
the amount of capital spending necessary to
sustain a company's current level of sales and
earnings. Capital spending necessary for growth
is not included in this number. This number
is usually not disclosed and must be estimated
based on information available through the company
or by other means. The cash outlay for maintenance
cap/ex can be different from the non-cash depreciation
charge.
TEV/(EBITDA
minus maintenance cap-x) is sometimes
a better way to determine the multiple of total
"cost" of the company (market price
of equity plus assumed debt) to the pre-tax
cash flow generated by that company. Capital
spending for growth should usually not penalize
the analysis of current cash flows because the
benefits of that spending will not be seen until
a future time and did not influence the current
year's earnings. It is the analyst's job to
determine whether the return from new capital
spending for future growth will be adequate
to justify the amount of spending.
Free
Cash Flow - this figure represents
cash available to shareholders before changes
in working capital. It is computed by taking
the net income, adding back depreciation and
amortization and subtracting maintenance cap/ex.
Free cash flow = (Net Income + Depreciation
+ Amortization) minus maintenance cap/ex
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