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How many levels does this game have?

Sometimes I ask myself, how many levels does this game have ?

Is it expensive ?

BEGINNER        -   P/E (doesn't work if company has lot of cash, debt , preferred stocks)
INTERMEDIATE  -  Enterprise value / EBITDA (Ignores capital expenditures )
ADVANCED        -  Enterprise value / EBIT

How good is it ?

BEGINNER         - ROE  = net income / equity  (not very usefull if company has lot of debt)
INTERMEDIATE  - ROC =net income /(1+TD/E) (imprecise if there is cash and goodwill)
ADVANCED        - ROIC=after tax operating earnings / (TA-CL-cash-goodwill)

These 2 advanced ratios are Joel Greenblatt's magic formula.

Now we get to the MASTER'S LEVEL.

Magic formula is based on past results , but past performance is no guarantee of future results.

For example - industries with decreasing demand (newspapers) TRB,JRC ,
big companies at the top of their popularity with no space where to grow MSFT,WMTetc.

So we need another tool.

If the previous was science (VALUE) now comes the art (GROWTH).I know we can't predict future, but it would be foolish to ignore it completely.

MASTER'S LEVEL

1.Warren Buffett's teacher of growth John Burr Williams

2.Warren Buffett

3.Pat Dorsey

Warren Buffett's formula for growth is the simpliest and my favourite.

More about his formula you can find here - http://www.fool.com/news/commentary/2005/commentary05051108.htm

The advantage of this formula is that we can put there our view of future - try to predict each year decreasing, same or increasing fin. results.

Here we come to the instric value of company. Sometimes the ratios lead to company with nice scores but without the chance to count the instric value (Its too difficult).

I agree with Warren Buffett if it's too difficult avoid it.

Can somebody post me the assumptions for instric value in case of  Chesapeake energy CHK ?

Thank you for your help :>

PS:IMHO the best is to use both magic formula and W.B. formula.

TD/E (Total debt / equity) , Enterprise value/EBITDA  - You can find these ratios in yahoo key statistics         
By GordonGekko at 2006-07-04 17:58 | Stocks | GordonGekko's blog


MSFT

I don't think you can call "Microsoft a company at the peak of its popularity with no space to grow".  It's trading near its 52-week low, so not exactly popular.  Microsoft has consistently grown revenues and earnings at more than 10% p.a. and has had a return on capital employed >70%.  I think it's one of the greatest bargains in today's market.  MSFT is in a limbo between traditional growth and value investors, and its earnings are depressed now because of the loss-making businesses.
By Bruno at Fri, 2006-07-07 12:45 | login or register to post comments

MSFT,WMT , PFE etc.

Hi Bruno,

thank you for your reply.

If revenues grow and company grows - price of shares should grow as well - maybe not in the short term , but definitely in long term.

Now the guestion is:   How long it takes Microsoft to double its revenues ?
                               (How many products it had to sell?)

The other question is: Do we know what will be the drivers of this growth ?
                                (xbox, ipod or anything else ?)

The last question is :  What about the competition ? Can we say who will be the winner ?
                                (Google,Ipod,explorer vs. firefox,windows vs. linux etc. ) 

I agree price went down and ratios don't look so bad (lot of cash,ROCE), BUT PEG ratio - I know not much popular between strict value investors is 1.49 apart from that  price in last 5 years ranges between 22-28 USD.(Bargain that is still a bargain is not a bargain:>:>:>)

If you could buy just 5 stocks and you had to hold them for at least 5 years would you choose Microsoft?
By GordonGekko at Sun, 2006-07-09 11:57 | login or register to post comments