Wynnstay (LSE:WYN) has shown average conventional earnings of 29.3p per share over twelve years. With the 19.9m shares it has in issue today if it earned 29.3p per share then that would be a total of £5.83m.
If I was to assume that this will be the earnings attributable to shareholders and, importantly, available to shareholders to remove from the company in each of the future years then I might value the equity at £72.1m:
£5.83m/0.08 = £72.9m
(The market capitalisation of WYN was 19.9m x £3.405 = £67.8m when I bought)
But conventional earnings does not usually adequately allow for the fact that with some companies earnings cannot be taken out of the company if it is to maintain its unit volume of output, spend enough to maintain its economic franchise (e.g. on working capital, new machinery, marketing, service quality, employee training, etc.) and invest in all value enhancing projects.
Some firms have to invest so heavily in these items that little of the conventional earnings can be taken out by shareholders.
Owner earnings is more useful than conventional earnings for getting at the amount shareholders can take after allowing for necessary investment to maintain the quality of the business.
"Owner earnings" in the past
£000s YEAR 2013 2014 2015 2016
Profit after interest and tax deduction 6,171 6,697 6,670 5,829
Add back non-cash items such as depreciation, goodwill and other amortisation 2,523 2,519 2,675 2,783
Totals to: Amount available for distribution to shareholders before considering the need to spend on fixed capital items to maintain the comp………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Prof. Glen Arnold
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