I just read the Little Book of Value Investing by Christopher Browne. One of the original value investors, along with his partners at Tweedy, Browne, he worked with Benjamin Graham and Warren Buffett in their early years. I read the paper by Tweedy, Browne called, “What has worked in investing.” It’s pretty much the same sort of thing but with more hard data and fewer anecdotes. All in all, yes, I’m convinced.
The most directly useful part of the book are three chapters that discuss how to value a company. Coincidentally, the same day that I finished the book, I received in the mail the year-end report for Net 1 UEPS, one of the stocks that I own in my MFI portfolio. I decided to evaluate UEPS using the steps outlined by Browne (he doesn’t actually list them as ‘steps’ – these are my arbitrary divisions of his commentary). Here goes.
Step 1: Current assets and current liabilities. The current assets are ~$240M, and the current liabilities are ~$40M, so the current ratio is 6. Browne says at least 2:1 – UEPS is doing well. The working capital is ~$200M; Browne says the more the better. The quick ratio is the (current assets – inventory) / current liabilities. Inventory is only ~$2M, so the quick ratio is only marginally different from the current ratio.
The 2005 current ratio was roughly 5, and the working capital was ~$115M. So 2006 seems an improvement over 2005.
Step 2: Long term assets and liabilities. Total LT assets are ~$29M; Browne says to subtract out intangibles and goodwill, so he would consider LT assets as ~$11M. The only long-term debt listed is deferred income taxes, at ~$18M. How does this compare to last year? In 2005, LT assets were ~$30M, or ~$9M excluding intangibles and goodwill. LT liabilities were ~$10M in 2005. So, LT assets (excluding intangibles) went up ~20%, while LT liabilities increased 80%. However, the long-term liabilities are small compared to cash on hand, never mind short-term assets. This seems healthy.
Step 3: Book value. Subtract all that the company owns from all that it owes: $209M. Browne suggests subtracting intangibles here as well, so the book value is $189M. The debt to equity ratio is ~0.3. This means that the company is funded primarily through investment. In 2005, this value was ~0.4, so this also seems to be improving. Browne says that even if this number is greater than 1 it’s not the end of the world, so the small improvement in debt to equity ratio seems not particularly important. What is important, I think, is that the value is significantly less than 1.
I’m going to skip step 5 for now: comparing the book value of UEPS to its competitors. This brings me to the end of the first chapter about evaluating a company, and it seems that the balance sheet shows that UEPS has a solid foundation.
The most directly useful part of the book are three chapters that discuss how to value a company. Coincidentally, the same day that I finished the book, I received in the mail the year-end report for Net 1 UEPS, one of the stocks that I own in my MFI portfolio. I decided to evaluate UEPS using the steps outlined by Browne (he doesn’t actually list them as ‘steps’ – these are my arbitrary divisions of his commentary). Here goes.
Step 1: Current assets and current liabilities. The current assets are ~$240M, and the current liabilities are ~$40M, so the current ratio is 6. Browne says at least 2:1 – UEPS is doing well. The working capital is ~$200M; Browne says the more the better. The quick ratio is the (current assets – inventory) / current liabilities. Inventory is only ~$2M, so the quick ratio is only marginally different from the current ratio.
The 2005 current ratio was roughly 5, and the working capital was ~$115M. So 2006 seems an improvement over 2005.
Step 2: Long term assets and liabilities. Total LT assets are ~$29M; Browne says to subtract out intangibles and goodwill, so he would consider LT assets as ~$11M. The only long-term debt listed is deferred income taxes, at ~$18M. How does this compare to last year? In 2005, LT assets were ~$30M, or ~$9M excluding intangibles and goodwill. LT liabilities were ~$10M in 2005. So, LT assets (excluding intangibles) went up ~20%, while LT liabilities increased 80%. However, the long-term liabilities are small compared to cash on hand, never mind short-term assets. This seems healthy.
Step 3: Book value. Subtract all that the company owns from all that it owes: $209M. Browne suggests subtracting intangibles here as well, so the book value is $189M. The debt to equity ratio is ~0.3. This means that the company is funded primarily through investment. In 2005, this value was ~0.4, so this also seems to be improving. Browne says that even if this number is greater than 1 it’s not the end of the world, so the small improvement in debt to equity ratio seems not particularly important. What is important, I think, is that the value is significantly less than 1.
I’m going to skip step 5 for now: comparing the book value of UEPS to its competitors. This brings me to the end of the first chapter about evaluating a company, and it seems that the balance sheet shows that UEPS has a solid foundation.
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