Case Study: Liquidation Value “We do liquidation analysis & liquidation analysis only.” - Peter Cundill One of the most simple and straightforward, as well as most useful estimations of intrinsic value is the liquidation value. The equation to estimate approximate liquidation value is: (Cash & Cash Equivalents + Accounts Receivable + Inventory - Total Liabilities) Benjamin Graham created this equation in the late 1920’s to help him d etermine if a company was valued in the marketplace below its approximate liquidation value. Graham believed investors could benefit greatly by buying a basket of companies whose share prices valued them below their Net Working Capital. Indeed, by primarily applying this strategy (along with some others) Benjamin Graham’s Graham-Newman Corp. achieved an average compound rate of return of approx. 21% annually for 20 years from 1936-1956. That’s some back test! In order for this equation to turn out accurate and reflect reality one must discount the accounts receivable (to factor in for doubtful accounts) as well as the inventory which seldom receives anything close to stated book value in a liquidation scenario. Therefore the adjusted equation should be such: (Cash & Cash Equivalents + Accounts Receivable (75% of book) + Inventory (50% of book) - Total Liabilities Inevitably, sometimes even buying a dollar for fifty cents is not enough. Therefore a word of caution: since companies valued at such depressed levels don’t usually have the greatest businesses in the world, it is highly advisable to delve deeper into their financial statements and learn some of the following points: - Makeup of Current Assets, a large cash position is always preferable to a large amount of Accounts Receivable and Inventory on the books. - The less debt on the liability side the better, best to make sure that whatever debt does exist is not short-term debt coming due and if it is make sure that the payment of such debt from cash & cash equivalents will not decimate your margin of safety. (when investing surprises are usually of the unpleasant kind)

Case Study Liquidation Value

Download PDF Report

Upload
theodor-tonca
View
218
Download
0

Embed Size (px)

Citation preview

8/3/2019 Case Study Liquidation Value

http://slidepdf.com/reader/full/case-study-liquidation-value 1/3

Case Study: Liquidation Value

“We do liquidation analysis & liquidation analysis only.” - Peter Cundill

One of the most simple and straightforward, as well as most useful estimations of intrinsic valueis the liquidation value. The equation to estimate approximate liquidation value is:

(Cash & Cash Equivalents + Accounts Receivable + Inventory - Total Liabilities)

Benjamin Graham created this equation in the late 1920’s to help him determine if a companywas valued in the marketplace below its approximate liquidation value. Graham believed

investors could benefit greatly by buying a basket of companies whose share prices valued them below their Net Working Capital. Indeed, by primarily applying this strategy (along with some others) Benjamin Graham’sGraham-Newman Corp. achieved an average compound rate of return of approx. 21% annuallyfor 20 years from 1936-1956. That’s some back test! In order for this equation to turn out accurate and reflect reality one must discount the accountsreceivable (to factor in for doubtful accounts) as well as the inventory which seldom receivesanything close to stated book value in a liquidation scenario. Therefore the adjusted equationshould be such:

(Cash & Cash Equivalents + Accounts Receivable (75% of book) + Inventory (50% of

book) - Total Liabilities

Inevitably, sometimes even buying a dollar for fifty cents is not enough. Therefore a wordof caution: since companies valued at such depressed levels don’t usually have the greatest businesses in the world, it is highly advisable to delve deeper into their financial statements andlearn some of the following points:

- Makeup of Current Assets, a large cash position is always preferable to a large amount of Accounts Receivable and Inventory on the books. - The less debt on the liability side the better, best to make sure that whatever debt does exist isnot short-term debt coming due and if it is make sure that the payment of such debt from cash &cash equivalents will not decimate your margin of safety. (when investing surprises are usuallyof the unpleasant kind)