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I made the statement in a recent article that "value" does not always follow profitability Buy singulair without prescription, . And, buying singulair online, Generic singulair online, it was to some degree motivated by a recent article I read by Fred Wilson, a VC and blogger who I follow (and highly recommend), discount singulair without prescription. Best price for singulair, He recently posted an article on profitability which criticized to some degree the business model employed by many internet startups which typically involves the scaling of headcount and resources in the hopes of revenue growth without nary a thought for the bottom line. While this is obviously not a strategy that works in the long run, real singulair without prescription, Order singulair on internet, I was surprised that a VC would write so negatively on this . Yes, the ultimate goal for a business is to be profitable and generate cash for its shareholders, singulair without a prescription. Singulair drug, I understand that in this economy liquidity in the form of credit, follow on investments, singulair professional, Cheap singulair pill, and much less lucrative exits - IPOs, acquisitions, pharmacy singulair, Cheap singulair overnight delivery, etc. - are hard to find, buy singulair without prescription. As a result, singulair no rx, No prescription singulair, cash is king and profitability is a significant concern for investors. Let's not forget, however, cheap singulair on internet, Cheap singulair internet, that investment return is built on more than just profitability:

Investment Return = Dividend + Change in Valuation * Change in Profitability

The dividend portion of this formula is simple, as mentioned in my last post on capital allocation decisions, order discount singulair online, Buy discount singulair online, management of a business can always decide to return any profits made to the investors.

The next two portions of the investment return formula are less concrete. Growth in profitability typically results in increasing value in your investment, cheap singulair from usa. Fda approved singulair, For example, whenever a business reports EPS growth, buy singulair online, Purchase singulair, we usually see a corresponding increases in share value. Unless, cheap singulair from canada, Singulair in uk, of course, if marke valuations already anticipate said growth or if recessionary pressures are decreasing risk appetite and driving down valuations regardless of profit success, approved singulair pharmacy. This has happened to many good companies during the current recession.

Buy singulair without prescription, For mature businesses, the likelihood of multiple expansion or outsized earnings growth is generally slower and less relied upon for returns, but, for growth businesses like the ones VCs typically invest in, it is this part of the equation which generates the bulk of returns. Singulair online without a prescription, This is also true of growth businesses - retail, tech, find no rx singulair, Singulair generic, alternative energy - that average investors can access in the public markets. Investments by a business' management in head count and other overhead may hurt profitability in the short run, singulair us, Discount singulair no rx, but they create a platform for creating scale in the business. As Fred argues in his article, singulair online sales, Singulair non prescription, profitability can be attacked through the management of costs and typically it can be done quickly whenever management decides it needs to focus on this side of the equation. That is why a lot of startups, cheap singulair pharmacy, Singulair, like Facebook and Google, focus instead on scaling revenue and service offerings, singulair in australia. Google, already dominant in search, continues to invest in new ventures and products and continually increasing its revenue (and ultimately it's profit) potential, buy singulair without prescription. Cheap singulair in usa, Yes, some companies like Craigslist, sale singulair, Singulair malaysia, are able to handle operating margin in excess of 90% through a super lean cost structure, but they offer just one specialized product and, singulair rx, Cheap singulair no rx, while organic growth is abundant now, they will eventually plateau and so will valuation.

Don't start buying into Dot-Bombs just yet
Am I arguing a 90s-tech-bubble style "paradigm shift". I admit that there's a real slippery slope in the arguments laid out above. If you believe valuation multiple expansion and likelihood of growth in profitability can be derived simply from metrics like revenue growth, then why not completely non-cash metrics like users, eyeballs, and hits. Buy singulair without prescription, I would never recommend going this far in trying to anticipate future performance of your investments. But, this is where I believe due diligence and familiarity with the industries you invest in are necessary and provide an advantage when investing in growth businesses. Asking the right questions of and demanding the right results from management is critical to monitoring growth businesses during the time that they focus more on revenue growth than profitability. My focus would be on the following:

In the event of a downturn or the maturation of the market, could the business quickly cut excess capacity and operate profitably?

How defensible is the current revenue level under a leaner cost structure?

How quickly are new investments expected to payback?

The answers to these questions are typically addressed during earnings calls or in quarterly and annual reporting. Analysis of historical return on invested capital both for the business as a whole and on a project by project basis can help you to determine how much to expect as return for marginal spending and at what point you should expect to see results hit the bottom line (usually after the valuation of your investment has already appreciated).

Business Analysis, Tutorials

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Posted by Dan Hung

at February 6, 2009

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In my recent post on using free cash flows to see through GAAP income numbers Buy synthroid without prescription, , I touched on the difference between enterprise value and equity investing. Buy cheap synthroid, When using enterprise value, you value a business based purely on its ability to generate free cash flow, synthroid pharmacy. Buy synthroid internet, Enterprise value investing presupposes that if you were to buy the entire business, you'd be able to make capital allocation decisions which allow you to extract value from free cash flow, buy synthroid on line. Cheap generic synthroid, The typical stock market investor rarely has this type of control over a business.

As a shareholder, online synthroid, Synthroid prescription, always remember that you have a right to your portion of the Company's profits. But, as it wouldn't make sense from a planning perspective to distribute profits each quarter based on the whims of a disparate shareholder group, management and the board of directors is given the fiduciary duty to determine what to distribute and what to keep as retained earnings, buy synthroid without prescription. As a non-control investor, find cheap synthroid, Drug synthroid, you must decide whether or not these decisions can create value for you as a shareholder.

Using the example of a savings account, synthroid medicine, Synthroid overnight delivery, if you chose to put $100 in a savings account, you'd likely demand a return of 3% or more, buy synthroid generic. Synthroid tablet, In the same sense, if management of a Company you're invested in came to you with the proposition, compare synthroid prices online, Synthroid alternative, "We can give you every dollar the Company earns this year or you can let us reinvest the profits and build a bigger more valuable company next year," you'd have some demands as far as how much more value they can deliver to you, cheap synthroid tablet. Generic synthroid, Not to mention the fact that by allowing them to control the Company's earnings, you're also giving up the opportunity of taking the money and putting it into a risk free savings account, synthroid buy. Buy synthroid without prescription, So, how can you tell if management is effectively reinvesting your dollars or how much to expect from their efforts going forward?. Lowest price synthroid, Return on Equity
The simplest measure of investment efficacy is:

net income / shareholders' equity

Basically, for the capital that shareholders invest in this business, cheap synthroid without prescription, Find synthroid online, how much profit is returned. As retained earnings are held on the balance sheet within shareholders' equity, order synthroid from us, Canada synthroid, this simple ratio gives you proxy for how well the Company has generated return on equity investments so far and the incremental net income growth you should expect on each dollar of earnings you allow them to retain.

Return on Invested Capital
ROE is inherently weakened by the fact that businesses can secure investment capital in more ways than just equity. If the Company borrows a lot of money to fund growth, synthroid australia, Buy cheapest synthroid, it can juice its return on equity numbers pretty significantly. A better metric might look like:

net income / (shareholders' equity + longterm debt)

This number, cheap synthroid online, Synthroid tablets, for any business that has long term debt will be lower than, return on equity, synthroid online sale. But, it is likely a more accurate picture of the return you can expect for each marginal dollar that management spends to grow the business.

Is higher ROE or ROIC always better?
Remember that ROE and ROIC are inherently backward looking formulas, buy synthroid without prescription. Cost synthroid, They can only be used for you to evaluate how management has invested capital historically. The law of diminishing marginal returns implies that return on each new dollar invested will fall in the future, cheap synthroid. Order generic synthroid, The best management teams do one of two things.

They maintain or grow on their historical ROIC rates.

Or, buy cheap synthroid online, Discount synthroid online, they recognize the diminishing value of their efforts and move quickly to distribute profits to shareholders as opposed to waste it in ill conceived attempts to grow the business.

Large acquisitions, the start up of new non-core businesses, synthroid no rx required, Synthroid for order, ever increasing headcounts, and continual purchase of new equipment are all examples of red flags. Remember that sometimes you won't see net income growth immediately but, buy synthroid from us, Buying synthroid, if return on invested capital remains at depressed levels or continues to decline over a several year period, it may be time to get out of Dodge, find discount synthroid online. Synthroid in malaysia. Buy synthroid from canada.

Business Analysis, Tutorials, Uncategorized

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Posted by Dan Hung

at February 5, 2009

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Buy zocor without prescription, We hear it all the time, "Businesses are worth the net present value of future cash flows." Usually a statement like this is followed by someone whipping out some convoluted discounted cash flow model. Zocor price, These models are usually based on free cash flow which is nearly always significantly different from the earnings or net income number reported by publicly reported companies.

Income statements mislead investors
Income statements are build off of generally accepted accounting principles (GAAP). Chief among these principles includes:

Recognizing revenue only when it is realized and earned as opposed to when cash is received (accrual basis versus cash basis)

Matching of expenses to the recognition of revenue as opposed to work is actually done or when inventory is purchased

These principles are designed to allow greater evaluation of a company's profitability because it actually matches how much must be spent to earn a given level of revenues, zocor discount. Zocor internet, Unfortunately, this does not always give the best representation of a company's performance, zocor buy drug. Order zocor from canada, A particular drawback to accrual accounting is the fact that expenses not matched to revenue are typically accounted to on a period-by-period basis. Most operating costs fall into this category, buy zocor without prescription. As a result, zocor information, Buy zocor once daily, income statements and GAAP earnings can be particularly misleading for growing companies which may be spending more higher administrative and office costs in preparation for scaling the business, but for which accrual accounting of revenues delays the impact of sales gains, buy cheapest zocor on line. Zocor cheap drug, A great example of how this can mislead investors was the hoopla that surrounded Apple's most recent earnings report. As a result of an accounting decision to capitalize iPhone revenues over the two-year contract that users sign, zocor online without prescription, Zocor online cheap, iPhone sales revenues are actually only reported at 1/8th the level that they are actually coming in. For a more detailed analysis, compare zocor prices, Where to order zocor, check out Bullish Cross.

Why free cash flow as opposed to cash generated?
The use of free cash flow comes down to an argument over enterprise value versus equity value. Buy zocor without prescription, The focus on net income, earnings, and adjusted earnings (as Andy Zaky uses in the aforementioned Bullish Cross link) by investors is an example of determining market value. This is the value investors are generally willing to pay for equity ownership in the business, find zocor on internet. Buy zocor canada, Earnings, because they include interest expense and tax expense and other expenses that come with running a business, buy cheap zocor internet, Purchase zocor online, (even if not perfect on a period-by-period basis) approximate potential distributions to shareholders in the long term.

Free cash flows, on the other hand, purchase zocor without prescription, Certified zocor, are capital structure neutral. They measure how much cash the company's operations generate and minus the minimum capital that you need to employ (maintenance capital expenditures) to maintain this level cash flow, zocor medication. Order discount zocor, Discounted cash flows based on FCF allow you to target enterprise value. Enterprise value is the "true" value of the business in its entirety, buy zocor without prescription. It's how much you would want to pay to acquire equity ownership as well as buyout any debt held by the firm (or how much more debt you could justify adding to the firm's capital structure).

Value and profitability are not necessarily equivalent
What about taxes, order zocor no prescription, Zocor in bangkok, interest expenses, and other expenses that seem to be excluded even if they are necessary, buy zocor. Buy zocor on internet, What about investments in R&D or expansion capital expenditures. This is the great dilemma of modern financial valuation, cheap zocor tablets. Get zocor, Theoretically, financing expenses and non-operational taxes and a whole host of other activities with consume cash are at the discretion of ownership and management, zocor approved. Zocor vendors, As a result, the value of a business can be changed dramatically by new ownership and, canadian pharmacy zocor, Cheap price zocor, thus even if a company is not profitable due to large non-operational expenses, it can be very "valuable" based on free cash flow performance, buy discount zocor. Zocor without prescription, And, this is where financial analysis can often unlock "hidden" value in a business.

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Buy glucophage without prescription, I haven't written about technical analysis in a long time. Cheap glucophage from canada, Given my shift away from trading and technical analysis to a more long term value focus, it's probably to be expected, online pharmacy glucophage. Cheap glucophage tablets, But, I realize that a lot of investors out there have their interest piqued by technical analysis and hope to incorporate it in their investment analysis, glucophage us. Glucophage drug, I also realize that true value investing can be difficult. Many of us don't have the time or the expertise to do extensive balance sheet analysis to determine liquidation value of our investment targets, low cost glucophage. How, then, can we invest with true margin of safety, buy glucophage without prescription. Online glucophage, Obviously, the main objective is to determine your fair valuation through fundamental means - multiples analysis, glucophage side effects, Order discount glucophage, financial projections, DCF, order glucophage from canada, Glucophage pharmacy online, etc - and invest in stocks trading at a discount. But, buy glucophage once daily, Overnight glucophage, how do we enter without risking too much to the downside.

This is a situation where I may differ with Benjamin Graham and Warren Buffet, find cheap glucophage online. Glucophage cheapest price, I don't necessarily have the bankroll to continuously average down my positions. Buy glucophage without prescription, Further, I live by the tenet that paper losses can often turn into material losses with the passage of time and unexpected needs for liquidity. Thus, buy glucophage from india, Glucophage bangkok, I realize that often times the trend really can be your friend. In the words of an investor I admire, discount glucophage without prescription, Buy glucophage no rx, it is often better to be in the wrong stock at the right time than in the right stock at the wrong time. So, glucophage cheap price, Buy glucophage in us, how do we determine the "right time".

The Rightside Chart

Here's Google's weekly chart from January 2005 to January 2008, buy glucophage online cheap. This is a near perfect longterm up trend, buy glucophage without prescription. Glucophage free delivery, This is what all investors wish their stocks' charts looked like 50-week moving average (1 year) support as well as the longterm trend coincide nearly perfectly signaling a modest and sustainable trajectory. Using a weekly chart gives you the overarching trend or, buy glucophage pills, Buy glucophage in canada, as an investor I admire calls it, the stock's continuum, buy cheap glucophage online, Discount glucophage no rx, and can provide context when you're fretting over more volatile day-to-day price movements.

Trend Reversals

Apple Reversal

Here's Apple's chart between mid 2002 and early 2004. Apple was notoriously trading near cash on the books before investors realized that this was not the same Apple of the mid-1990s and the rest is history, glucophage non prescription. Cost of glucophage, Given Apple's history of poor cash usage and inability to get traction in its computer business, even the most seasoned value investor might not necessarily have felt completely comfortable with the stock, cheapest glucophage. Buy glucophage without prescription, But, a look at the chart provides technical confirmation that the market is beginning realize the intrinsic value at Apple. Cheap glucophage on internet, First, we see the stock trade towards it's 50-day moving average and weakly break towards the 200-day moving average, glucophage no rx required. Cheap glucophage from uk, The stock subsequently spends 6-months testing prior resistance while the 50-day and 200-day moving average converge. Finally, buy discount glucophage online, Canadian glucophage, as highlighted, we see a breakout on heavy volume simultaneously with inversion of the 50-day moving average as well as a moving average cross over, buy glucophage internet. Glucophage in australia, In subsequent months, we see the formation of a new rightside chart where the 50-day moving average acts as support for the initial acceleration phase and we'll eventually see the 200-day moving average (roughly equivalent to the 50-week moving average) become the support for the long term continuum.

Apple's chart shows reversal happening in a swift and nearly simultaneous fashion, buy glucophage online. The truth is, reversals can be longer and more painstaking, buy glucophage without prescription. Sale glucophage, Generally, several steps will be accomplished:

Breakout through the 50-day SMA

Initial "weak" rise towards 200-day SMA

Retracement and testing of the 50-day SMA (accumulation)

Repeated testing of 200-day and 50-day resistance and support leading to convergence between the two moving averages

Strong breakout above the 200-day and the formation of a new rightside chart

A Case Study for Today

BKE Value and Technicals!

The Buckle is a company I've been watching for a while, compare glucophage prices online. The stock has been punished by the current retail pull back despite being one of few retailers able sustain same store sales growth, no debt, and significant upside for square footage growth (in the event of an economic turn around). Retailers, particularly ones with true growth stories, are rarely true value plays. They typically rent locations and source their clothes from other manufacturers and thus have few hard assets and, if run properly, are inventory light. For example, the Buckle has just $6.87 in tangible book value per share, a significant amount of downside risk if the Company were to be forced into liquidation for one reason or another.

But, given how well the Company has managed to perform through the downturn and management's shareholder friendly policies including a significant dividend (3.5+% at current prices) and a buy back plan, it would seem that the fair value for this stock is likely significantly better than $20-$22/share. Despite this, even if I believe that this stock has significant value above the current price, I'd be reticent to invest at these levels given the current risk/reward trade off. Looking at the current chart, though, it seems that the stock has found downside support and has begun base formation (accumulation). For me, I would be willing to trade a few basis points of return for a confirmation breakout which would provide a higher likelihood of immediate return and series of resistance levels to use as stop losses.

Full Disclosure: Long shares of Apple and Google at the time of writing. .