what's happening with rcr?, page-11

Hi March09

Thanks for your reply. Wow I can't believe my post was moderated for such an inncuous word - anyway here it is without the so called proffanity:

Yes, return on shareholders equity. I.e. contributed equity (investors cash) investments and retained earnings. you use accounting/book value as this is true representation of the companies ability to put cash to good use.

I think you might want to try doing your analysis the other way around - The eps/sp multiple probably better used for relative price comparisons when other fundamentals are equal, to see which one is cheaper. (Note: this is not foolproof if both companies, or the whole market, are overvalued!!)

Whereas looking at ROE, EBIT margin and FCF growth is a much better way of analyzing the quantitative strengths of the actual underlying business - which, implicitly, should not have any basis on what someone is willing to pay for that business (i.e. the share price). In fact, you should be wary of any ratio that utilises the actual price of the shares, except as simply a measure of price comparison.

If you are after capital gains (as opposed to income) you want to buy businesses that are going to create more than $1 of value for every $1 of retained earnings. These measures will give you a better idea of the likelihood of the business being able to do that.

If a business is making low returns on its shareholders equity it not getting much back on its retained earnings. Put another way, its not investing YOUR money very well. And if those returns are getting lower and lower... well you get the picture.

Of course all historical analysis is no promise of what will happen in the future. So for all I know, RCR could implement great cost control from here, increase EBIT margins on all that juicy revenue they have, and suddenly you've got an ROE of 25% and the current price will look like an absolute steal......

But, in my experience, leopards don't change their spots.. often.

So, while not exactly a "turn around" (because the company is profitable), anyone who owns RCR should at least understand that its not currently an efficient wealth creator and good future gains will only come IF management can execute cost controls to get higher margins going forward.

Personally i'd rather find companies that are already efficient wealth creators but are cheap because of current market volatility, and buy those.

My number one pick, is Austin Engineering :) Not as cheap as it was last year (like most things) but still value and has great qualitative attributes as well as good numbers.

I hope this post is doesn't come across like a tossers rant lol.

CHeers
Sauced