A margin of safety is the margin of undervaluation of the market price to the intrinsic value. In some cases a quantitative analysis of a security will indicate a false margin of safety. The falseness can go in both directions (under- and overestimates).
Common situations in studying Free Cash Flow Yields
A low cash flow yield (price to last book year´s free cash flow)
- Free cash flow is expected to grow and the market has priced it already
- The companys operations are capital intensive with high barriers of entry (such as utilities)
A high cash flow yield
- The company doesn´t pay dividends and has a bad reputation of reinvesting excess cash
- The company is expected to have lost earnings power
Common situations in studying Net Asset Value
A security is trading under Net Net Current Asset Value
- The company is expected to take on a big loss in the future
- The company has off balance sheet liabilities
A security is trading well over book value
- The compay´s operations require little capital. High return on equity.
Any comme nts are very welcome.