Hot Features
Premium
Customisable watchlists with full streaming quotes from leading exchanges, such as LSE, NASDAQ, NYSE, AMEX, Bovespa, BIT and more.
Yesterday’s Newsletter taught us that we need to use a measure of net profits as a percentage of net tangible assets to judge many value investments.
We also know that any observations of past returns on tangible assets are useful only in so far as they convey information about the future. To connect the future with the past we need a large dose of judgement based on qualitative reasoning.
There were a few other elements to pick up, e.g.
- Add back the year’s amortisation of accounting goodwill to the profit number because this does not reduce economic profit;
- Deduct tax from profit because we are interested in after tax return;
- Accounts receivables to be included in the tangible assets figure because this is a use of shareholders’ money;
- In evaluating managers’ efficiency in applying shareholders money to investment then what they paid for an acquisition, including all the accounting goodwill already deducted, should be included (added back);
- Conservatively estimate earnings power (a much bigger concept than reported profit);
- Estimate an adequate level of tangible assets to generate earnings power.
Unfortunately Buffett does not express the elements we are to take from the balance sheet to arrive at a suitable Net Tangible Assets, NTA.
But, now that we have a starting point for our thinking we can get to grips with the reality of modern company accounts. We’ll learn by confronting each issue as we go.
The raw data – with a few twists
I set out in a common form the data presented in the annual accounts of our three companies and work from there (most recent year). Balance sheet numbers are for the start of the year.
| £’000s |
MS International (April 2017) |
Haynes (May 2017) |
Dewhurst (September 2016) |
||
| INCOME STATEMENT | |||||
| Profit after tax |
1,498 |
1,374 |
3,508 |
||
| Amortisation charge this year for accounting goodwill following acquisitions |
0 |
0 |
0 |
||
| Exceptional items distorting profits (positive or negative) |
0 |
50 |
0 |
||
| Profit for shareholders |
1,498 |
1,424 |
3,508 |
||
| CURRENT ASSETS AND LIABILITIES | |||||
| Inventories |
7,043 |
4,614 |
4,751 |
||
| Receivables |
8,996 |
7,499 |
8,056 |
||
| Cash needed for operations (assumed) |
1,000 |
1,000 |
1,000 |
||
| Other current assets |
902 |
926 |
0 |
||
| Payables |
-15,253 |
-5,188 |
-4,502 |
||
| Short-term debt |
-0 |
-2,163 |
0 |
||
| Other current liabilities |
-154 |
0 |
-348 |
||
| Working capital for operations |
2,534 |
6,688 |
8,957 |
||
| Surplus cash (assumed) |
11,758 |
1,548 |
13,958 |
||
| NON-CURRENT ASSETS AND LIABILITIES | |||||
| Property, Plant and Equipment |
15,955 |
8,434 |
8,581 |
||
| Goodwill in BS |
2,700 |
2,883 |
2,695 |
||
| Previously written-off acquired goodwill – add back |
0 |
0 |
6,328 |
||
| Other acquired intangible assets in BS |
0 |
3,683 |
83 |
||
| Previously written-off other acquired intangibles – add back |
0 |
3,411 |
657 |
||
| Long-term debt |
-0 |
0 |
0 |
||
| Other non-current liabilities |
-0 |
0 |
0 |
||
| Net non-current assets for operations |
18,655 |
18,411 |
18,344 |
||
| OTHER ITEMS TO CONSIDER | |||||
| Defined benefit pension deficit |
7,644 |
15,101 |
12,197 |
||
| Internally generated intangible assets capitalised to BS |
2,971 |
15,815 |
88 |
||
| Investments (in shares, bonds, etc.) |
0 |
0 |
0 |
||
| Operating lease non-cancellable commitments |
1,138 |
572 |
480 |
||
| Preference share capital |
0 |
0 |
0 |
||
| Minority interests in profit |
0 |
0 |
55 |
||
| Minority interests in net assets |
0 |
0 |
534 |
There are a few things to think about with MS International
- Which NTA?
The net tangible asset amount used by the managers during the year might change considerably over the 365 days. In such circumstances, if we use the opening NTA in the denominator we’ll get a very different percentage return on NTA than if we use the closing NTA figure.
A possibility here is to use the average of the opening and closing NTA.
Keeping things simple for today, I use what the managers had at their disposal at the beginning of the year. In future I’ll use the average between the two balance sheets.
- “Tangible” here has a special definition.
Tangible here includes the intangible asset of goodwill created from buying another company – for MSI £2,700k.
However, in the same way as conventional NTA calculations, it excludes internally generated intangible items (For MSI £2,971k).
MSI has many items included as internally generated intangible assets in its BS:
Trade names £755k;
Design database £559k;………….
………………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
