Anthony Bolton, the great British investor, does not have a favourite valuation measure because he likes to look at a range, believing it dangerous to focus on only one. Note that for all the measures listed below he looks at them both on an absolute basis and on a relative basis.
Absolute values are particularly useful at market extremes to avoid being sucked into a share at times of great exuberance.
He normally looks at the ratio of price to predicted earnings for the current year, and for the next two years. He is particularly looking for companies that are priced at less than 10 times the earnings in two years from now.
Cash flow yield well above prevailing interest rates.
Free cash flow as a percentage of market capitalization. Looking for a high cash flow calculated after paying for changes in working capital and capex as a percentage of the amount investors are paying for the shares. This is both a useful input to valuation estimations and for financial solvency consideration.
Enterprise value (EV) to gross cash flow
EV is the market value of the company’s shares plus its net debt
Gross cash flow is before deduction of interest
EBITDA – Earnings before deduction of Interest, Tax, Depreciation and Amortisation
EV is adjusted down to the extent that there are minority interests and pension fund deficits.
This is a measure examined by companies when valuing a prospective acquisition, it is therefore useful if you are interested in anticipating potential take-over bids.
Prospective free cash flow per share. Next year’s estimated FCF.
Price of shares relative to sales per share, and EV to sales
Particularly useful for loss-ma
Prof. Glen Arnold
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