Leading indicators of an economic contraction, page-305

"Not that I seek formulas as far as investment is concerned as I believe when it comes to long term investments, it takes more than just a formula. However I do use similar matrix as a part of understanding business and their capital allocation practices. "

@pkm60

The second I clicked "Post Message" on the post containing that formula I was concerned that there might be some interpretation of it being put forth as some kind of all-knowing, all-seeing, catch-all mathematical expression that is the solution to all the exactitudes that form part of equity valuation.

When, in fact, all it was meant to be is an example of one approach one might use in applying investment caution at the individual company level (where it is demonstrably possible to do so on a sustainable and repeatable basis), as opposed to trying to get the macro call right which, from my long-made observations, is not possible to do.

So, while it is not THE definitive valuation formula, it has been proven to be invaluable to me as a quick, easy-to-apply, ready reckoner whenever I come across a company for the first time and seek to get a quick, first-pass impression of whether or not such a company has scope to be considered investment-grade, in keeping with my business-owner investing philosophy.


"As far as FCF yield is concern, wouldn't it make more sense to use OCF before tax ( i.e to take out income tax paid from the OCF), especially when it comes to comparing FCF yield with risk free returns unless of courses the risk free return we are comparing against is net of income tax"

Besides the fact that it avoids subjective judgements inherent in deriving accounting profits, the appeal of looking at Cash Flow Yield on EV is its simplicity and ease of use. And given, as I said, the context of a business owner, it is a requirement to consider the cash that hits my pocket, after all liabilities and claims have been settled, including tax.

Therefore, just as if I outright owned a coffee shop or a shoe factory or a trucking company I would plan my affairs (budgeting, maintenance, expenses, growth, dividends) around the extent of the net cash that hits my pocket, I think no differently about a business which happens to be publicly-listed.

Besides, considering after-tax free cash flows in a business context does not preclude doing the same thing for the cash income derived from risk free investments in order to compare apples with apples.

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