Posted by kcchongnz > 2013-03-17 18:37 | Report Abuse

Cold Eye冷眼’s 5 yardsticks for investment Cold Eye, during his talk on 16/3/2013, listed 5 important criteria for investing in a stock as below: 1. Return on equity, ROE, 2. Cash flow from operations and free cash flow, 3. PE ratio, 4. Dividend yield and 5. Net tangible asset backing per share, NTA If you invest RM100,000 in a business, you would want to have a reasonable return from the capital, or equity you put in. A business is risky and probably you may want a minimum return of say 25%. For investing in the share market, you may want a minimum return say 10%, 6% above the return you get from bank deposit? If the business only returns you 4%, why would you want to invest in it when you can get that rate from FD without having any worries at all? In your business, you would expect that all your debtors pay you promptly and that you don’t have to stock up a lot of inventories which will tied up your capital. Otherwise you would have to put in more capital each year even though you make money. I would expect the hard cash I can received must be about the earnings I make each year. My business would also require capital expenses each year to keep it going, better growing bigger so that I would earn more in the future. This I would need to buy more and replenish the equipment , buy or open more shops etc. It would be ideal if these expenses can be met with the cash I receive each year and not having to come up with more of my own money or borrow from bank. After that, I would be happy if there is still money left for me to draw out (as dividend), or the company can have extra money to invest in other lucrative business. This money available after all the capital expenses is termed as free cash flow, or FCF. If the above business make a lot of money, say 30000 a year, or 30%, would you buy it if the asking price is 1 million, or a PE of 33? This will give you a earnings yield of only 3%. Hence a good business does not mean it is a good investment if the price is too high. How nice it would be if the business earns enough for me to draw down 10,000 a year consistently. For my dividend yield would be 10%, 2.5 times that of FD rate. Besides my business is still growing. Well if at the end if I want to exit from the business, if the net tangible asset of my assets worth more than what I put in, or more, I can recoup my initial investment. These assets must of course the more valuable the better, for example hard cash, property and land etc, rather than some money which I have been arguing with the debtors whether they are going to pay me or not, or some inventories which are outdated. Hence NTA is important too although in some businesses, example the service industry where the important assets are its people, its technology or brand name rather than hard assets. Do you have any good stocks meeting the majority of the above criteria as given by Cold Eye to share? Or any lemon you may know which you want to tell others to be careful about? This discussions here is for sharing of knowledge and information and should not be construed as a forum for hard selling or condemning others of their stocks without giving justifications. Kcchongnz 17/3/2013