船头船尾: Cold Eye’s 5 yardsticks for investment

Cold Eye listed 5 important criteria on his talk on 16-March-2013.

Investor want to have a reasonable return from the capital for the equity put in.
The return rate depend on the business risk.
You would want to have a risk that higher than a risk free rate. Says, bank FD provide interest rate of 4%, you will target for a min return say 10%-15% (6% - 11% above FD rate) for the risk you take.
[Note]: There is some issues and pitfall on ROE, do perform DuPont analysis on the ROE, or alternately I prefer to use ROIC.

Business owner would expect debtors pay you promptly and you don;t have to stock up a lot of inventories which tied up your capital.
Else, you have to put in more capital each year even you make one.
Do expect the hard cash received must be about the earnings each year.
For each year, the business need capex to keep it going (so the owner can ear more in future) - e.g. buy more/relenish equipment, buy/open more shops.
It would be good if the capex can be met with the cash I receveid from operations and owner no need to come up with more money.
It will be fantastic if there is still leftover money to draw out (diviend), or the company can have extra money to invest in other lucrative business.
Check
- Average OCF same as reported earnigns over the years?
- Is FCF in genral positive over the years?
- Is the average FCF >= 5% of Revenue?
[Note]: You may want to read more on Cash Flow Statement Analaysis.

A business might not be a right investment if price is nor right. If you buy a business with good ROE (say 30%) on P/E of 33 will only give you a earnings yield of only 3%.
If the yield is less than FD, you may want to put the money to bank to earn risk free return.
The prowess in investing is not knowing how to buying great companies at any price, but good companies at a cheap price.
We should look for company < 10 or < 15 (good company with growth prospect)
[Note]: P/E will ignore the debt an cash on the balance sheet. EV and EBIT is a good alternative if an investor want to take care on this item.

How nice if my bussiness can have extra cash (FCF) after CAPEX investment and the left over money send back to owner as Dividend. (You may want to read more on Cash Flow Statement Analaysis.)
This way, the owner can have additional money to spend while the business is still growing and the dividend is likely ti increase in the future.
DY = Dividend per Share for a Year / Stock Price
It could be a good investment if DY > FD rate.

Investor can recoup the initial investment if the NTA worth more than what he put in.
If the NTA per share > stock price, you may be in for a bargain.
More valuable (e.g. hard cash, property, land) asset is better.
Receiveables - debtors might not want to pay me.
Inventories - it may be outdated.
Some business (e.g. service industry) where the important assets is not tangible e.g. its technology, brand name, people......
[Note]: This is align with Benjamin Graham Net Net & Negative Enterprise Value.

More cold eye sharings can be found on below links:-

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