The intrinsic value of a security is a function of following factors:
- Its net assets,
- its potential to generate free cash flow,
- its financial strength and
- the quality of its management.
The aim is that any valuation of a specific security will become a quantitative analysis with a qualitative weighing.
Balance sheet assessment
- How are assets accounted for (fair value or mark to market)?
- What is the value of the inventory (lifetime, margins, etc,)?
- How do we value intangible assets (influence on cash flow, earnings, market value, etc)?
- Are fixed assets a fundamental attributor to earnings or can they be tradable?
- What are the capital requirements of the industry?
- What are the working capital requirements of the industry?
- Has there been share dillution in the past?
Free cash flow power
- Where does earnings come from?
- How sustainable are margins?
- How does the company compete (cost, market leader, niche or follower)?
- Which forces impact free cash flow (raw materials, vendors)?
- Is the operation likely to be able to increase sales?
- Is there much uncertainty about the future of the industry?
- Is the industry cyclical og secular?
- How leveraged is the company?
- Is the company net cash positive?
- What is the interest percentage of its debt and short term liablilities?
- What would happen to the company if credit markets would close for a year?
- How long has current management been in place?
- Does current management have a significant ownership in the company?
- What is the cost of its options compensation?
- What is the managments record of allocating capital (reinvestment, m&a, dividends, debt reduction, share buybacks?
- Have there been any reports indicating mismanagement?
The process, the list and anything that has to do with the method is under constant scrutiny, so if you have any comments or thoughts, do not hesitate to share.