Via your tutorial this post of some 6 months ago - viz., https://hotcopper.com.au/posts/56802033/single - you provide a useful community service to non-accountant types who would otherwise take reported profit figures at face value, when Reported NPAT is really a proximal representation of a company's earnings over any given period.
NPAT is mostly an acceptably accurate approximation, guided by the accounting standards, but sometimes that approximation bears very little reflection to the true underlying financial performance of a company.
Which is why I, too, prefer to adjust reported NPAT to a "cash flow backed NPAT" sort of basis.
But where I tend to disagree with your approach is that I like to be more conservative in not stripping out doubtful debt provisions if bad debt risings are shown to be a normal cost of doing business.
Also, while I would strip out amortisation of goodwillthat has arisen from acquisitions, I certainly wouldn't ignore amortisation of IP that was acquired because presumably the business needs to continue to invest shareholder capital to keep all of its IP current and up to date, whether that is its internally created legacy IP or IP that has been acquired.
But putting accounting pedantry aside, where I am in firm agreement with you is that the current market value of the company bears very slim reflection of where I believe the business will be valued in the future.
If the growth strategy which has been articulated to the market is executed properly (and given the structural characteristics of the industry, as well as the track record of AFL management to date, I struggle to see why it wouldn't be properly executed), then I have little doubt that AFL will be valued several multiples higher than its current Enterprise Value of a mere $30m.
Before I started building my position in AFL a few weeks ago, part of the thinking was that this business has all the hallmarks of becoming, to the legal profession in Australia, what KPG [*] is to the accounting profession, i.e., a very successful, and value-adding, sector consolidator.
(I dislike the phrase "professional services roll-up play" because that connotes mere empire building acquisitions for the sake of them, often resulting in One plus One equaling One Point Five, whereas the real shareholder value creation in KPG's case - and I identify similar value-creating attributes in AFL's case - arises not just from loosely and randomly cobbling together a bunch of accounting (or legal) practices, but from the actual moving of the acquired businesses up the value curve.)
It warrants mention that just a few short years ago KPG was a business valued around $40m - the same order of magnitude to AFL today.
Today KPG is a $230m company... that near six-fold increase in value requiring zero recourse to shareholders for capital.
Just saying.... with the logical implications for AFL.
[*] Disclaimer: I am a KPG shareholder, so to the extent that my investment in AFL is born out of my experience with KPG, there might be a not-insignificant degree of proxy bias baked into this post.
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AFL Price at posting:
43.5¢ Sentiment: None Disclosure: Held
(20min delay)