How to Value a Business
Want to know how to buy a dollar for fifty cents? Learn different ways to value a business so that you can expand your sphere of confidence and competence.
Understanding the True Profit Margin
8/7/2009 | Joe Ponzio | 33 Comments | about: KO / WAG
On the heels of yesterday’s article, I received an e-mail from a friend this afternoon asking me about my thoughts on inventory turns and profit margins. To paraphrase: The math doesn’t work right, as the inventory turns don’t affect the profit margins each year.
I didn’t do a good job of explaining it properly; so, let’s look at the “true” profit margin of a company.
Expanding Your Sphere of Confidence and Competence
1/16/2009 | Joe Ponzio | 27 Comments | about: USB / WFC
When it comes to buying stocks, there are a million different approaches, a million different ways to value companies, a million different charts to look at… You get the idea – it can be dizzying, especially if you are trying to learn how to invest and find some stable ground on which you can build your strategy and knowledge base.
That said, time and time again, the great value investors – Warren Buffett, Charlie Munger, Seth Klarman, and others – all teach investors one fundamental rule to intelligent investing: Stick with companies you understand really well…in industries you understand really well.
If you don’t know a company or industry really well, you have to choices: learn it or skip it. You should skip it while you’re learning. You should learn more so you have more choices and opportunities at your discretion. Continue reading »
Free Cash Flow vs. Owner Earnings
7/14/2008 | Joe Ponzio | 33 Comments
EDIT: This item is no longer available. Please see the book to learn more about owner earnings and free cash flow.
At the end of this post, you’ll find a “Buy Now” button to purchase a 20-page report comparing Free Cash Flow to Warren Buffett’s owner earnings. Though the two terms (free cash flow and owner earnings) are often used interchangeably, they are not always the same. Confusing the two can have a dramatic effect on your intrinsic value calculations.
Phil Fisher on Profit Margins
6/24/2008 | Joe Ponzio | 18 Comments | about: BBI / GM / PFE
Phil Fisher
Does the company have a worthwhile profit margin?
To hammer the importance of this point home, you need not look further than traditional auto manufacturers.
Continue reading »
But Can They Sell It?
6/24/2008 | Joe Ponzio | 4 Comments | about: AAPL / ADBE / GOOG / MSFT
You’ve heard the clichés: He could sell ice to an Eskimo. She could sell a ketchup popsicle to a woman in white gloves. The sales force is the lifeblood of an organization. After all, the best product in the world is worthless if nobody knows about it. And so, we move on to Phil Fisher’s fourth point:
Does the company have an above-average sales organization?
What’s Happening with Research and Development?
6/22/2008 | Joe Ponzio | 12 Comments | about: AMLN / GSK / LLY / PFE / TEVA
Today’s research and development (R&D) is tomorrow’s new product or process. The other day we (or more specifically, Phil Fisher) asked, “Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?”
The goal of R&D is to produce new products, services, or processes that will “still further increase total sales potentials” for the company. Not an easy question to answer, Fisher asks:
How effective are the company’s research and development efforts in relation to its size?
Will They Seek Out More Profitable Lines?
6/18/2008 | Joe Ponzio | 9 Comments | about: C / PFE
Businesses generally expand in three ways – increased sales of existing products, sales (and increased sales) of new products, and acquisitions to expand product lines. We looked at “increased sales of existing products” in Can They Increase Sales For Several Years? Fisher then went on to talk about “sales (and increased sales) of new products”:
Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
There are two schools of thought on this subject – the rational, business-like approach and the “other” approach.
Continue reading »
Can They Increase Sales For Several Years?
6/11/2008 | Joe Ponzio | 3 Comments | about: AMLN / GOOG
In Common Stocks and Uncommon Profits
Unfortunately, the future is more than a simple mathematical equation. Enter Phil Fisher.
Continue reading »
Don’t Ignore The Assets
1/14/2008 | Joe Ponzio | 16 Comments | about: BNI
There is a school of thought that says that the value of a business is entirely in its future cash flows and that all assets are tools that provide that cash flow. In essence, many people believe that assets and equity should be ignored entirely. Let’s look at it from a private owner perspective and follow it up later in the week with an examination of Buffett’s early partnership letters:
Continue reading »
From Free Cash Flow To Earnings And Back
11/19/2007 | Joe Ponzio | 23 Comments
I’m just getting caught up on the slew of comments here and I wanted to jump in again on this string over on What The Heck Is CROIC? There seems to be some confusion as to how free cash flow and GAAP earnings are related and I figured that this would be a good topic rather than let it get buried in the comments.
Do GAAP earnings drive free cash flow? Or, does free cash flow drive earnings?
