Simple blueprint for that investigation search and scan of stock value when investing bizish

Short blueprint for valuating stocks

This valuation method was created to see if there is any value in a stock. It evolves and is reiterated with time. 

The stocks that are discussed in the “Articles” section use these methods. It’s nothing new or fancy. The point is to be as optimized and straightforward as possible to scan any stock very fast. 

Use it or parts of it if you like. It was mostly made to give my investing an edge.  Some is based on what Buffet says. You maybe know most of it already. 

Table of Content

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References

To be continued

Stock parameters to plot and look at:

Listing and plotting the following for the last 10 years for each company:
  • PE-value over time
  • PB-value over time
  • PS-value over time
  • Cash flow over time
  • Assets over time +- goodwill
  • Dividend over time
  • Long term debt
  • CEO – lenght and experiene
  • Bord Director – length and experience
  • Owners
  • Technical levels
  • Market forcast 10 year ahead

1. Cash flow
- in stock valuation

“We tend to prefer the business which drowns in cash – it just makes so much money that one of the main characteristics of it is the amount of cash coming in. There are other businesses, like the construction equipment business that my old friend John Anderson ran. He used to say: ‘you work hard all year, and at the end of the year there’s your profit – sitting in the yard.’ There was never any cash, just more used construction equipment. We tend to hate businesses like that.”
– Charlie Munger
 
Buffet and Munger has on of their critea that to invest in businesses it need to have a strong cash flow. 

What is cash flow?

Just to make it clear what cash flow is or means:
– Cash flow is the amouth of cash the company has paid out or paid in during a period. 
 
There are mainly three cash flows (plus one):
 
1. Cash from operating activities (CFO)
2. Cash from investing activities

1. Cash (flow) from operating activities (CFO)

CFO is the most interesting cash flow and what most people mean when they say cash flow. It shows the cash in from sales minus cash paid to suppliers, interest paid on debt and paid taxes. Basically the operating profit. 

It is important that this cash flow grows year by year. It gives a growing business. But how much do we want it to grow year by year? What is the average and what is considered good? Is there some type of ratio to look at? 

2. Cash (flow) from investing activities (CIO)

Why to look at cash flow?

Why it is important to look at a companies cash flow, ie. the historical cash flow, is to predict future cash flow or to see if the company is undervalued. 

Sometimes investors tend to have their eyes fixed on more trending areas and miss the less trending businesses. Companies can be discounted due to this. 

Why is a strong cash flow good?

A lot of money coming in can be used and allocated to grow the business even more. This is hard for a company with low cash flow but a high value through eg. the inventory it sits on, or the future gains its highly anticipated novel technology might bring. 

It is important to compare the cash flow of a business against competitors in the same segment too.  

Cash flow ratios.

Cash flow vs stock price, inventory, costs, average growth per year

What is a good cashflow?

First of, it is very likely that a positive cashflow is better than a negative: The cash into the business covers the cash out for expenses. However, the expenses

Historical cash flow to predict future cash flow

Forecasting exact cash flow is hard. There can be a interruption in the market plus many other changes and factors. 

One more accessible way to predict cash flow is to make a trendline from the previous years and thereby expect what it might be in the future. But here you just assume all will continue as has and you are not taking in technological changes. new competitors etc. 

There is a rule that says that the longer a company has been in business, the less likely it is to go out of business. Here it could be the same for evaluating the cash flow. The trend 10-20 years back, with low fluctuations, might also continue for the coming 5 years. Here things might also depend on the market segment and the size of the company of course. Eg, Coca Cola vs a smaller silver miner. The price and market share for the sugar drink will be about the same and it will continue to be sold following the same trend as before. However, the value of the silver on the world market can swing 2-5 times up and down making the future cash flow very dependent on the market.

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