Nick Antill


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Nick Antill is a Director of EconoMatters, an energy consultancy offering an extensive range of skills to clients involved with gas markets worldwide. He is also an associate of BG Training, a City financial training company, specialising in equity valuation. Prior to this, Nick spent 16 years as a financial analyst covering the oil and gas sector and was responsible for Morgan Stanley's European team.

Company valuation

  1. The most often-repeated mistake in finance is "It doesn't matter - it's only a non-cash item" .

    While it is true that the value of a company is the discounted value of its future free cash flows, it does not follow that non-cash items do not matter. There is a clear difference between provisions for deferred taxation that are unlikely ever to be paid, and provisions for decommissioning a nuclear power station - a large future cost that will certainly be incurred.

  2. It is easy to get to a high value for a company - just underestimate the capital investments that it will need to make.

    There are three components to a cash flow forecast: profit, which is often analysed quite carefully ; depreciation and other non-cash items, which are usually analysed adequately; and capital expenditure, which is often a banged-in number that is quite inconsistent with the other two, and generally much too low.

  3. Valuations must be based on realistic long term assumptions - at best GDP growth rates and barely adequate returns.

    It is tempting, when valuing fast growing companies with strong technical advantages over their rivals, to assume that these conditions will continue forever. They will not. As the saying goes, 'In the end, everything is a toaster'. If this means that the forecast needs to be a very long one, so be it - it will be less inaccurate than running a valuation off an accurate five year forecast, and then extrapolating this to infinity.

  4. Don't spend too much time worrying about financial efficiency.

    Playing mathematical games with the weighted average cost of capital is tempting and fun, but generally has a disappointingly small effect on valuation. Substituting debt for equity shifts value from the government to the providers of capital because the company pays less tax. That is it. And even then there is an offsetting factor - it is more likely to incur everyone the inconvenience of going bankrupt.

  5. Remember the 'Polly Peck phenomenon ', especially in countries with high inflation.

    If a company operates in a weak currency with high inflation, its revenues , costs and profits will probably grow quickly. If it funds itself by borrowing in a strong currency, with low interest rates, it will pay little interest, but will tend to make large unrealised currency losses on its debt. It may still be looking very profitable on the day that it is declared insolvent.

  6. Unfunded pension schemes should be treated as debt.

    Many companies fund their employees' pensions by paying into schemes operated by independent fund managers. These schemes are off their balance sheets. Some companies operate a 'pay-as-you-go' system. They will show a provision for pension liabilities on their balance sheets, generally offset by a pile of cash among their assets. These companies are effectively borrowing from their employees - the provision should be treated as debt.

  7. Remember to ask: 'Who's cash flow is it anyway?'

    Companies consolidate 100% of the accounts of their subsidiaries, even if they only own 51% of the shares in the subsidiary. In the profit and loss account the profit that is not attributable to their shareholders is deducted and shown as being attributable to third parties. Unless it is paid out in dividend, however, the cash remains inside the company. This means that the popular 'cash flow per share' measure implies that the shares should be valued by including something that does not belong to them - they should not.

  8. Accounting depreciation is a poor measure of impairment of value .

    If an asset is bought for 100 and has a five year life then it will be depreciated at a rate of 20 a year. This is not the same as saying that its value falls at a rate of & pound ;20 a year. The result is that the profitability of the asset is generally understated early in its life and overstated later in its life. This means that companies' profitability tends to be understated when they grow, and overstated when they stop growing.

  9. You can't judge an acquisition by whether it adds to earnings.

    Acquisitions are just very big, very long term, investments. So they are extreme examples of the rule mentioned above that new investments tend to look unprofitable in the early years. This does not mean that they are bad investments. Company managers have preferred not to explain this awkward fact, but to evade it by using accounting tricks to avoid creating and amortising goodwill. New accounting rules are increasingly making this more difficult. It should not matter, but managers still believe that it does.

  10. Operating leases are debt - they just don't look like it.

    Companies often lease assets - aeroplanes, ships or hotels, for example. If the lease effectively transfers the asset, it is a finance lease, and looks like debt in the accounts. If it doesn't then the lease just appears as rental payments in the operating costs. But it is still debt, and the shares will still reflect that fact, being much more volatile than it looks as if they 'ought' to be.

www.economatters.com, www.baines.co.uk

'The backlash against analysts is in full swing. Don't be diverted by the spectacle, however enjoyable it might appear. Use the research available dispassionately. As in all human life, you'll find there's good and bad there. Just be sure, once you've digested, to formulate your own conclusions.'

”Edmond Warner



Global-Investor Book of Investing Rules(c) Invaluable Advice from 150 Master Investors
The Global-Investor Book of Investing Rules: Invaluable Advice from 150 Master Investors
ISBN: 0130094013
EAN: 2147483647
Year: 2005
Pages: 164

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