I posted on ROE, and have what I consider a very sound understanding of P&L, balance sheets, ROE, cash flow ... however will elaborate on other points in a way that might offend some for its simplicity.
And this might be considered "off topic" however given this WES thread has focused on details such as the above is probably appropriate.
I actually believe it is sometimes too easy to get tied down in ratios and statistics. My ROE post highlighted that limited value that alone has, and Camden has also alluded to it. It is rare to find a business where ratios are static.
Sometimes it is better to forget all the ROE and stand back for a minute and say "is this the sort of business I want to invest in".
With WES we have a business (i) the key parts of which should be relatively immune to economic conditions, (ii) should be able to generate a modest level of organic / system growth over time, (iii) due to prior ownership neglect has been able to play "catch up" in some areas with WOW, and (iv) pays a dividend that, realistically, should be able to grow over time, and (v) has a decent balance sheet - ok, couldn't keep financials out totally!!
The above are the basics, close to statistic agnostic, and to me indicate a business I'd be comfortable to buy into. From there the only question comes down to "what price am I willing to pay for this?". I'll happily acknowledge that the above ignore some questions like What growth will be achieved?, what rate will dividends grow at? so as initially stated it is very simplistic. However there are times - not always - when I'm happy with that approach. Using WOW as an example, some years back when the market was stating WOW will be growing at 15 to 20% for a few years, and pricing accordingly, I was thinking "that won't last". Last year when people were less interested, price $25, and yield 5% full franked, I figured that is good value and bought.
Acaca15: Why would one pay a more than book? For the simple reason that book is reflecting history, and any price paid above book is a reflection of what is deemed to be good will created (ie. what has WES increased the value of their business portfolio to?). Has Coles EBITDA increased since purchase? Has Bunnings? If they have has this impacted the actual value of those businesses? You need to remember that Coles, WOW, CCL ... do not revalue their business values (like a Listed Investment Company or managed fund would do). They run a business and let the market value it how it sees fit.
Persistentone: Re your example of a business that generates $9 free cash flow year in year out, without it growing, if I liked the balance sheet I'd buy with my ears pinned back PROVIDED: (i) the directors were shareholder friendly enough that they returned the cash to shareholders - dividends or share buybacks, and (ii) the price I paid compensated me for the fact there would be no growth. If I could buy it on a 10% cash yield, for instance, why not? There's a place for stocks like that in my portfolio at the right price.
Roger Montgomery: I'm not sure why such a focus on him in this thread. I haven't read much about what he says - only one thing actually on a micro cap at the time, BGL, where he totally misunderstood the balance sheet which surprised me. What it did do for me was make me re-check the figures to make sure I was right. A long way of saying there is never a substitute for understanding the business yourself.
MM: following on from the above, if you didn't understand CCP you made the right call in not following Roger's tip.
Cheers
MJS
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