A few thoughts on Margin of Safety

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.

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