CAPITAL SUFFICIENCY
Capital-hungry companies are sometimes hard to detect, but there are a few obvious signs.
Companies in capital-intensive industries, such as manufacturing, transportation, or telecommunications, are likely suspects.
Here are a few indicators.
1. Share buybacks
The number of shares outstanding can be a real simple indicator of a capital hungry company. A company using cash to retire shares - if acting sensibly - is telling you that it generates more capital than it needs. On the other hand, if you look at a company like IBM, ROE has grown substantially, and massive share buybacks are a major reason.
Warning! : When evaluating share buybacks, make sure to look at actual shares outstanding. Relying on company news releases alone can be misleading. Companies also buy back shares to support employee incentive programs or to accumulate shares for an acquisition. Such repurchases may be okay but aren't the kind of repurchases that increase return on equity for remaining owners. (Comment: to take a look at HaiO share buyback.)
2. Cash flow ratio
Is cash flow from operations enough to meet investing requirements (capital assets being the main form of investment) and financing requirements (in this case, the repayment of debt)?
If not, it's back to the capital markets. This figure is pretty elusive unless you have - and study - statements of cash flow.
3. Lengthening asset cycles
If accounts receivable collection periods and inventory holding periods are lengthening (number of days' sales in accounts receivable and inventory), that forewarns the need for more capital.
4. Working capital
A company requiring steady increases in workng capital to support sales requires, naturally, capital. Working capital is capital.
Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Friday 24 April 2009
Capital-intensive and Capital-hungry companies
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