There are times where technology steals the story line, yet sometimes proper use of technology enhances story telling. I would declare UP my favorite movie of the year, followed by Avatar and District 9. Watching Alvin and the Chipmunks tonight...don't think it will post a challenge to the 3 listed movies.
This review by New York Times on Avatar is worth reading.
The plot is simple enough, and it reminded me and my friends of the plot of The Last Samurai combined with Pocahontas. I half expected (neh...hoped for) Colors of the Wind to be played when the scene sweeps though the enthralling forest on Pandora. Also, it follows the classic hero's journey quite closely...thanks to Baby Chao who introduced me to Joseph Campbell.
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Had a awesome 4 hours discussion session with some E.y.E pple yesterday. Really enjoyed the dedication to learning shown by Jason, Eric, Darryl and Jin Wen.
I'd like to comment on a few key learnings:
1. There is a link between Return on Invested Capital and the range of Price to Book ratio a company sells for. Company earning high ROIC will rarely be available for low PB. Investors do recognize there is some intangibles at work that create return on capital over cost of capital.
2. For asset heavy industry, do look out for off balance sheet items and capitalize operating lease before calculating ROA or other ratios as different financing method will create HUGE difference.
3. Value of Growth
(a) Growth creates value for shareholder only when ROIC > WACC. When return is less than cost, you are destroying value.
IMAGINE:
I can borrow $100 at 5% interest (WACC) to purchase a T-bill yielding 3% (ROIC). EVERY 100 dollars investment LOSES 2.
If i can GROW this to a 100,000 dollar business, I will be losing 2,000 due to this growth!
The challenges we face with equity analysis is that both WACC and ROIC are hard to estimate. However, we just need to be roughly right, and if the spread is wide enough, it should satisfy us.
(b) Estimating free cash flow
In some of the spreadsheets for cash flow projection, depreciation expense added back is less than the capital expenditure and projected into infinity. Should this be the case, the analyst is expecting Return on Asset to increase over time and the company can do more with less!
Example:
Given that
Return on incremental asset = 10%
Net Profit margin = 20%
If incremental sales is 100, then Net profit is 20 and Need of additional asset is 200.
Assume net profit = operating cashflow, then,
Operating Cashflow ---- 20
Add back dep ----- xxx
Capital Expenditure ---- (200)
It is most likely that the to grow, free cash flow will be negative. Only in the very rare case of super high return on asset (e.g. due to very high asset turnover or profit margins) can a company grow quickly without huge investment in fixed asset.
Furthermore, working capital charges is a real charges. If your growth is partly due to expansion in Account Receivables, you are not making cash profit. Worse still, there are some companies out there that incur debt at the corporate level and lend to customer to buy their own things? This should only be considered sales with Alice in Wonderland accounting.
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After reading about investing and doing it for about 6 years, i can simply say that I learnt not to get easily conned by snake oil peddlers.
“[A] respect for evidence compels me to incline toward the hypothesis that most portfolio decision makers should go out of business — take up plumbing, teach Greek, or help produce the annual GNP by serving as corporate executives. Even if this advice to drop dead is good advice, it obviously is not counsel that will be eagerly followed. Few people will commit suicide without a push."
- Paul Samuelson
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