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</head> | ||
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<body> | ||
$body$ | ||
<nav class="navbar navbar-expand bg-light"> | ||
<div class="container-fluid"> | ||
<a class="navbar-brand" href="/"><img src="/logo.png" alt="intBASIS" width="24" height="24"></a> | ||
<button class="navbar-toggler" type="button" data-bs-toggle="collapse" data-bs-target="#navbarText" | ||
aria-controls="navbarText" aria-expanded="false" aria-label="Toggle navigation"><span | ||
class="navbar-toggler-icon"></span></button> | ||
<div class="collapse navbar-collapse" id="navbarText"> | ||
<ul class="navbar-nav me-auto mb-2 mb-lg-0"> | ||
<li class="nav-item"> | ||
<a href="/" class="nav-link"> | ||
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Introduction | ||
</a> | ||
</li> | ||
<li class="nav-item"> | ||
<a href="/present-value" class="nav-link"> | ||
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Present Value | ||
</a> | ||
</li> | ||
<li class="nav-item"> | ||
<a href="/annuity" class="nav-link"> | ||
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Annuity | ||
</a> | ||
</li> | ||
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<main class="container mt-3 mb-3"> | ||
$body$ | ||
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</head> | ||
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<body> | ||
<h1 id="cashflow-multiple">Cashflow Multiple</h1> | ||
<p>Investing is always about giving money now for money later. So, you | ||
need to ask, is this a good price? Is the stock cheap or expensive? | ||
How economical is the price?</p> | ||
<h3 id="the-cashflow-multiple-helps-answer">The <em>Cashflow | ||
Multiple</em> helps answer:</h3> | ||
<h3 id="is-the-business-cheap-or-expensive"><em>Is the business cheap | ||
or expensive?</em></h3> | ||
<nav class="navbar navbar-expand bg-light"> | ||
<div class="container-fluid"> | ||
<a class="navbar-brand" href="/"><img src="/logo.png" alt="intBASIS" width="24" height="24"></a> | ||
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aria-controls="navbarText" aria-expanded="false" aria-label="Toggle navigation"><span | ||
class="navbar-toggler-icon"></span></button> | ||
<div class="collapse navbar-collapse" id="navbarText"> | ||
<ul class="navbar-nav me-auto mb-2 mb-lg-0"> | ||
<li class="nav-item"> | ||
<a href="/" class="nav-link"> | ||
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Introduction | ||
</a> | ||
</li> | ||
<li class="nav-item"> | ||
<a href="/present-value" class="nav-link"> | ||
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Present Value | ||
</a> | ||
</li> | ||
<li class="nav-item"> | ||
<a href="/annuity" class="nav-link"> | ||
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Annuity | ||
</a> | ||
</li> | ||
</ul> | ||
<span class="navbar-text d-none d-lg-block"> | ||
<em>A bird in the hand is worth two in the bush.</em> | ||
</span> | ||
</div> | ||
</div> | ||
</nav> | ||
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<main class="container mt-3 mb-3"> | ||
<h1 id="cashflow-multiple">Cashflow Multiple</h1> | ||
<p>Investing is always about exchanging money now for money later. | ||
So, you need to ask, “is this a good price for this investment?” Is | ||
the stock cheap or expensive? How economical is the price?</p> | ||
<p class="lead"> | ||
The <strong>Cashflow Multiple</strong> helps answer: <em>Is the | ||
business cheap or expensive?</em> | ||
</p> | ||
<p>It does so by specifically answering:<br /> | ||
<strong>How many years</strong> would it take for the business to | ||
earn back the price I paid for it <strong>in discretionary | ||
cashflow</strong>?</p> | ||
<p>For example, say that a stock is selling for $200 per | ||
share.<br /> | ||
<!-- Image of price tag --> If the business earns $10 per share in | ||
discretionary cashflow, then the <em>Cashflow Multiple</em> is 20. | ||
“It’s 20x cashflow.”</p> | ||
<h3 id="pop-quiz">Pop Quiz</h3> | ||
<ol type="1"> | ||
<li>If the <em>Cashflow Multiple</em> is 5, how long would it take | ||
for the business to earn back the price I paid for it in | ||
discretionary cashflow?</li> | ||
<li>A stock has a <em>Cashflow Multiple</em> of 9 and costs $45 per | ||
share. How much discretionary cashflow does the business earn per | ||
share?</li> | ||
<li>Which is the better deal: a stock with a <em>Cashflow | ||
Multiple</em> of 10x or a stock with a <em>Cashflow Multiple</em> of | ||
20x?</li> | ||
</ol> | ||
<h4 id="answers">Answers</h4> | ||
<ol type="1"> | ||
<li>5 years</li> | ||
<li>$5 per share</li> | ||
<li>The stock with a <em>Cashflow Multiple</em> of 10x is the better | ||
deal. It would take 10 years for the business to earn back the price | ||
you paid for it. The stock with a <em>Cashflow Multiple</em> of 20x | ||
would take 20 years to earn back the price you paid for it.</li> | ||
</ol> | ||
<h3 id="formula">Formula</h3> | ||
<p>The <em>Cashflow Multiple</em> is calculated by dividing the | ||
price of the stock by the discretionary cashflow per share.</p> | ||
<p><span class="math display">\[ | ||
\begin{align*} | ||
\text{Cashflow Multiple} &= \frac{\text{Share | ||
Price}}{\text{Cashflow Per Share}} \\ | ||
&= \frac{\text{Market Cap}}{\text{Annual Cashflow}} | ||
\end{align*} | ||
\]</span></p> | ||
<h3 id="discretionary-cashflow">Discretionary Cashflow</h3> | ||
<p>Discretionary cashflow is the cash “left over” each year that the | ||
owners can direct as they please. The owners could pay the cash to | ||
themselves, pay down debt, retain it, or reinvest it in the | ||
business. The freedom to pay the cash to themselves is what makes it | ||
a good metric for evaluating the price of a business.</p> | ||
<p>When looking at financial statements you will not find a line for | ||
discretionary cashflow. It is not a GAAP or IFRS metric. When | ||
evaluating a business you should use your best understanding of the | ||
business and its operations to approximate discretionary cashflow. | ||
Remember the principle that it is better to be roughly right than | ||
precisely wrong.</p> | ||
<h3 id="so-is-it-a-good-price">So, Is it a Good Price?</h3> | ||
<p>Once you’ve found an estimate for the <em>Cashflow Multiple</em> | ||
you can compare it to other <em>Cashflow Multiples</em>. Most | ||
commonly you will compare it to the <em>Cashflow Multiples</em> of | ||
other stocks in the same industry, or to the <em>Cashflow | ||
Multiples</em> of the stock’s own history.</p> | ||
<p>For example, you follow ACME INC. and the stock has been trading | ||
at a <em>Cashflow Multiple</em> of 25x for the past 10 years. You | ||
would love to own ACME INC. but, 25x seems expensive. Then, one day, | ||
the stock drops to 15x. The multiple versus the historical norm | ||
gives you a sense that the stock is relatively cheap.</p> | ||
<h3 id="tie-it-to-intrinsic-value">Tie it to Intrinsic Value</h3> | ||
<p>Finally, you should use the <a href="/annuity">Annuity | ||
Calculator</a> to develop a sense for what multiples correspond to | ||
what rates of growth.</p> | ||
<p>For example, a 17x multiple may be reasonable for a business | ||
growing at 20% per year. But, for a business without growth | ||
prospects, 4x may be more reasonable.</p> | ||
<hr /> | ||
<h4 id="additional-info">Additional Info</h4> | ||
<p>The <em>Cashflow Multiple</em> is the inverse of the <em>Cashflow | ||
Yield</em>.</p> | ||
<p>Free Cashflow (FCF) is equivalent to Discretionary Cashflow for | ||
the purpose of this article. While there are technical formulae for | ||
FCF, the purpose of either is to represent cash that can be freely | ||
directed by the owners.</p> | ||
<p>We may use the term “stock” or “business” interchangeably when | ||
talking of investing in the stock market. We evaluate buying stocks | ||
in the same way we would an entire business.</p> | ||
<p>GAAP and IFRS are accounting standards which dictate what items | ||
appear in financial statements.</p> | ||
</main> | ||
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</head> | ||
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<body> | ||
<h1 id="hello-blog">Hello, Blog</h1> | ||
<p><em>This is the blog for Discounted.Cash</em></p> | ||
<h2 id="articles">Articles</h2> | ||
<p><a href="./cashflow-multiple.html">Cashflow Multiple</a></p> | ||
<nav class="navbar navbar-expand bg-light"> | ||
<div class="container-fluid"> | ||
<a class="navbar-brand" href="/"><img src="/logo.png" alt="intBASIS" width="24" height="24"></a> | ||
<button class="navbar-toggler" type="button" data-bs-toggle="collapse" data-bs-target="#navbarText" | ||
aria-controls="navbarText" aria-expanded="false" aria-label="Toggle navigation"><span | ||
class="navbar-toggler-icon"></span></button> | ||
<div class="collapse navbar-collapse" id="navbarText"> | ||
<ul class="navbar-nav me-auto mb-2 mb-lg-0"> | ||
<li class="nav-item"> | ||
<a href="/" class="nav-link"> | ||
|
||
Introduction | ||
</a> | ||
</li> | ||
<li class="nav-item"> | ||
<a href="/present-value" class="nav-link"> | ||
|
||
Present Value | ||
</a> | ||
</li> | ||
<li class="nav-item"> | ||
<a href="/annuity" class="nav-link"> | ||
|
||
Annuity | ||
</a> | ||
</li> | ||
</ul> | ||
<span class="navbar-text d-none d-lg-block"> | ||
<em>A bird in the hand is worth two in the bush.</em> | ||
</span> | ||
</div> | ||
</div> | ||
</nav> | ||
|
||
<main class="container mt-3 mb-3"> | ||
<h1 id="hello-blog">Hello, Blog</h1> | ||
<p><em>This is the blog for Discounted.Cash</em></p> | ||
<h2 id="articles">Articles</h2> | ||
<p><a href="./cashflow-multiple.html">Cashflow Multiple</a></p> | ||
</main> | ||
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