Calculating net tangible assets problem

RandomInvestor · 12 January 2017

Hey guys so I am having a problem calculating net tangible assets. I took Apple as an example, and I did the companies calculation and its accurate its 119629000, they say if the market price is less than the net tangible assets then the stock might be undervalued. Are we also now supposed to do the last step which is the NTA divided by the total shares outstanding?

So that would be 119629000 / 5.3 billion? But I think the figures on Yahoo finance are in millions so do I write 5.3 million instead of billion?

If so that would equal to : 22.57, is this the correct figure?

luutzu · 12 January 2017

RandomInvestor said:
Hey guys so I am having a problem calculating net tangible assets. I took Apple as an example, and I did the companies calculation and its accurate its 119629000, they say if the market price is less than the net tangible assets then the stock might be undervalued. Are we also now supposed to do the last step which is the NTA divided by the total shares outstanding?

So that would be 119629000 / 5.3 billion? But I think the figures on Yahoo finance are in millions so do I write 5.3 million instead of billion?

If so that would equal to : 22.57, is this the correct figure?

You mean something like this?

RandomInvestor · 12 January 2017

I have no idea what I am reading lol, but can you tell me if my calculation is correct?

luutzu · 12 January 2017

RandomInvestor said:
Hey guys so I am having a problem calculating net tangible assets. I took Apple as an example, and I did the companies calculation and its accurate its 119629000, they say if the market price is less than the net tangible assets then the stock might be undervalued. Are we also now supposed to do the last step which is the NTA divided by the total shares outstanding?

So that would be 119629000 / 5.3 billion? But I think the figures on Yahoo finance are in millions so do I write 5.3 million instead of billion?

If so that would equal to : 22.57, is this the correct figure?

NTA is what its name suggests: tangible assets (i.e. excl. goodwill and intangibles) net of all liabilities.

Whether you need to divide the total shares or not depends on whether you want to work on the total company basis or the per share basis. It's the same thing, just different unit of measurement.

A company like Apple is probably not one to be valued through its tangible assets. Those tend to be for industrial, heavy, real asset kind of business... and often you'd use, or at least I do, on businesses that's been heavily discounted because its earnings/industry are in a downturn but its assets is way too sweet against its share price. i.e. bargain hunting.

luutzu · 12 January 2017

RandomInvestor said:
I have no idea what I am reading lol, but can you tell me if my calculation is correct?

For NTA and similar figures, the databases out there are usually quite accurate. That is, they can calculate what is reported in the AR.

As to whether those tangibles are truly accurate, i.e. reflects the business and its assets; i.e. whether management uses the appropriate measure of their tangible assets valuation/estimates... those are things you would need to read the notes and the methods as detailed in their AR... know the business and what those assets are, then come to your own conclusion as to whether or not the reported figures reflect reality or not.

RandomInvestor · 12 January 2017

You said a company like Apple is not one to be measured through its net tangible assets where the hell do I find all this information investing has so much hidden crap, I am bound to make a million mistakes and not even realize it. I couldn't find anything on which industries you should use the nta formula on.

luutzu · 12 January 2017

RandomInvestor said:
I have no idea what I am reading lol, but can you tell me if my calculation is correct?

Trying to show that, to me anyway, a single figure isn't enough. You'd need to understand its context... in relations to other measures to see a more complete picture.

So take a look at MMA Offshore (MRM). It's selling something like 17 cents on its reported NTA dollar. It has written down some $250M in its vessels and bases just the last two years.

By NTA valuation alone, it is a massive bargain.

But then you can't be certain, or as certain as you can, without looking at its other measures. For instance, its Earnings-based valuation; its business, its balance book, whether those are real assets or just highly paid assets mgt bought at the top of the market.

For what it's worth, if you're starting out... maybe study smaller companies. Or ones with simpler operations. I find there's just way too much info to read and digest and understand on big companies. Eventually, once you know how figures and ratios are measured and imply, then study the crazy big companies. It make more sense then as you're not too preoccupy with definitions of what you're trying to figure out - spend the time then to see all the various financial instruments and detailed notes as big companies have a whole bunch of weird stuff you don't want to get into at the start of your studies.

That doesn't mean small businesses are better or more honest... or more 'growthy"... just easier to start off on.

RandomInvestor · 12 January 2017

luutzu said:
Trying to show that, to me anyway, a single figure isn't enough. You'd need to understand its context... in relations to other measures to see a more complete picture.

So take a look at MMA Offshore (MRM). It's selling something like 17 cents on its reported NTA dollar. It has written down some $250M in its vessels and bases just the last two years.

By NTA valuation alone, it is a massive bargain.

But then you can't be certain, or as certain as you can, without looking at its other measures. For instance, its Earnings-based valuation; its business, its balance book, whether those are real assets or just highly paid assets mgt bought at the top of the market.

For what it's worth, if you're starting out... maybe study smaller companies. Or ones with simpler operations. I find there's just way too much info to read and digest and understand on big companies. Eventually, once you know how figures and ratios are measured and imply, then study the crazy big companies. It make more sense then as you're not too preoccupy with definitions of what you're trying to figure out - spend the time then to see all the various financial instruments and detailed notes as big companies have a whole bunch of weird stuff you don't want to get into at the start of your studies.

That doesn't mean small businesses are better or more honest... or more 'growthy"... just easier to start off on.

Ok I'll take your advice, man this sort of confuses me, on the part where you think something then there is like 100 more things behind it. Like you were saying I need to understand its context, what context for apple?

luutzu · 12 January 2017

RandomInvestor said:
You said a company like Apple is not one to be measured through its net tangible assets where the hell do I find all this information investing has so much hidden crap, I am bound to make a million mistakes and not even realize it. I couldn't find anything on which industries you should use the nta formula on.

Ben Graham says (somewhere) that Wall St tend to value a company based on its earnings (and earnings forecasts, earnings potentials) and tend to ignore the tangible assets.

In most cases, the earnings-based approach is sensible and on the whole, what you'd want to use. That is, all the assets in the world are of no use if it can't produce earnings/profits.

But as Graham also pointed out, there are times when the Market put too much focus on earnings and completely ignore the assets.

This is where you'd want to be when the Market presents it to you. They present when the company misses a quarter or a half yearly earnings and sales forecast; or when the industry is in a downturn or suffering some set back.

Case in point would be MRM above. And in another couple of years, it'll be all the property developers.

So take Graham's other advice and see the stock as representing the entire business. Try to understand that business and, as Warren Buffett tells us, everything will flow from that understanding.

That is, once you know the business and how it makes it money... you then know how best to value it. Value it through its assets or its earnings, or a combination of both.

So take those high tech companies... they tend to have very little tangible assets. They also tend to have negative or no earnings... How would you price them. Either don't touch them or get to really know their business and their industry to then speculate on its future potential.

i.e. know the business and know that you are investing in a living organism, of sort. The future cannot be guarantee, but it does make a lot of sense that the company is so well established, with enough real assets and money to buy politicians and other friends to fend off competitors or destroy them.

RandomInvestor · 12 January 2017

luutzu said:
Ben Graham says (somewhere) that Wall St tend to value a company based on its earnings (and earnings forecasts, earnings potentials) and tend to ignore the tangible assets.

In most cases, the earnings-based approach is sensible and on the whole, what you'd want to use. That is, all the assets in the world are of no use if it can't produce earnings/profits.

But as Graham also pointed out, there are times when the Market put too much focus on earnings and completely ignore the assets.

This is where you'd want to be when the Market presents it to you. They present when the company misses a quarter or a half yearly earnings and sales forecast; or when the industry is in a downturn or suffering some set back.

Case in point would be MRM above. And in another couple of years, it'll be all the property developers.

So take Graham's other advice and see the stock as representing the entire business. Try to understand that business and, as Warren Buffett tells us, everything will flow from that understanding.

That is, once you know the business and how it makes it money... you then know how best to value it. Value it through its assets or its earnings, or a combination of both.

So take those high tech companies... they tend to have very little tangible assets. They also tend to have negative or no earnings... How would you price them. Either don't touch them or get to really know their business and their industry to then speculate on its future potential.

i.e. know the business and know that you are investing in a living organism, of sort. The future cannot be guarantee, but it does make a lot of sense that the company is so well established, with enough real assets and money to buy politicians and other friends to fend off competitors or destroy them.

Ah ok thanks man. One last thing when you say earnings you refer to netincome right?

luutzu · 12 January 2017

RandomInvestor said:
Ah ok thanks man. One last thing when you say earnings you refer to netincome right?

Earnings generally refers to the net profit (after tax etc.). But you can also take it to mean the Net Operating Cash Flows, depends on the business and its machineries. Definitely don't take the earnings before tax and interests and depreciation (EBITDA)... that's what management tend to report, and often report and emphasised in struggling businesses. As Buffett said, in the real world there are taxes, interests and assets do depreciate (wear and tear etc).

So short answer is one of those - it depends.

But idea is to get a sense of the company's earning power. How much money does its business make, generally. Don't take one or two year's reported figures as guide to its future; don't take the past as guide either. i.e. it depends on where you think the business is heading.

But having said all that, the future are somewhat easier to predict/guess at when you buy into established businesses dominant in its industry; and the industry isn't likely to die anytime soon. That gives you more confidence about its future prospects.

But then there are companies who has historically lose money, are currently looking shaky, but the future might be very bright. Whether you want to bet on that future or not, that's from your understanding of the business and whether you have enough gamble money to play with.

Maybe hints from all these lengthy replies is that investing isn't just about the numbers alone. As craft or galumay says elsewhere, idea is try to not make too many mistakes, or not bet where there's a chance of complete lost of your capital. Might need to work full time if that happens.

Protect that risk of total loss and try to understand the business enough to gauge its future prospects. With some luck, the future could be a whole lot brighter than now, but you're betting that given its position and history, it'll just chug along and you're getting in at either a fair price or a very cheap one.

RandomInvestor · 12 January 2017

Ugh. Yeah Earning power refers to things like Return on assets, return on equity right? Yeah investing isn't all in numbers, but isn't our job to convert those numbers into words?

luutzu · 12 January 2017

RandomInvestor said:
Ok I'll take your advice, man this sort of confuses me, on the part where you think something then there is like 100 more things behind it. Like you were saying I need to understand its context, what context for apple?

I don't follow Apple so I don't really know the context of its business development.

But in terms of valuation, the context would be what I showed in the valuation calculator for MRM above.

See how the market has historically value Apple against its reported earnings, against its NTA... what multiples over those, for example.

Compare that to the current market price and those figures and it might give you some context and insight into what the market is thinking. Note that that is historical, so might not apply in the future.

But yea, there's a lot to learn... so while investing is probably the easiest way to make money (just sitting on your behind and think, really), but it's not quick or easy, not at first. Especially if you have little money since the work you're putting in to learn is huge, but the rewards on those small capital base, even if it's 50% a year, can be very "unprofitable"... and making a couple of major mistakes will set you back a couple of years easy.

So not easy, but worth it in the end.

I mean, on some company we're trying to predict the future... that we know all about its finances, its debt levels etc., but what does that mean for its future performance. That's the almost impossible part to get right... and that's where a lot of digging and a whole lot of luck comes in to make that fortune, or not.

luutzu · 12 January 2017

RandomInvestor said:
Ugh. Yeah Earning power refers to things like Return on assets, return on equity right? Yeah investing isn't all in numbers, but isn't our job to convert those numbers into words?

I guess you could interpret it that way. But to me, ROE and ROA etc. are more a measure of profitability and efficiency, rather than earning power. Though I guess it does make sense that that's the business earning power.

So how I define earning power is what the business generally takes home given all its margins, efficiency, debt paid off, taxes paid etc. etc. Note the average, normalised, best guestimate... Get that earnings, multiply it by a sensible ratio and see if the price and value make sense to get into.

Others will do discounted cash flows and all that... To me we're trying to buy a business, and buying it cheap... so we're not trying to value the business to its nearest whatever. But whatever works for you.

I turn the numbers into charts... I'm more visual and when it's charted I can pretty much see what's what. It tend to jump out at you. And of course all these are historical figures and when the bargain is so obvious on that historical performance basis, expect some short term pain as the market is ignoring that beautiful past and take a dim view of the company's future. Whether you're right or the market is wrong... hard to say until a couple of years later.

though sometime you do get lucky and the market turn around a lot quicker. Take Sirtex... I jumped in a couple weeks ago and so far it's doing very well... But that could turn back in a heartbeat... and that's where you better know your stuff or you'll get played.

RandomInvestor · 12 January 2017

luutzu said:
I guess you could interpret it that way. But to me, ROE and ROA etc. are more a measure of profitability and efficiency, rather than earning power. Though I guess it does make sense that that's the business earning power.

So how I define earning power is what the business generally takes home given all its margins, efficiency, debt paid off, taxes paid etc. etc. Note the average, normalised, best guestimate... Get that earnings, multiply it by a sensible ratio and see if the price and value make sense to get into.

Others will do discounted cash flows and all that... To me we're trying to buy a business, and buying it cheap... so we're not trying to value the business to its nearest whatever. But whatever works for you.

I turn the numbers into charts... I'm more visual and when it's charted I can pretty much see what's what. It tend to jump out at you. And of course all these are historical figures and when the bargain is so obvious on that historical performance basis, expect some short term pain as the market is ignoring that beautiful past and take a dim view of the company's future. Whether you're right or the market is wrong... hard to say until a couple of years later.

though sometime you do get lucky and the market turn around a lot quicker. Take Sirtex... I jumped in a couple weeks ago and so far it's doing very well... But that could turn back in a heartbeat... and that's where you better know your stuff or you'll get played.

Ah ok I was thinking of buying Sirtex it seems undervalued it has dropped over 50% surely its undervalued now and its a very solid company.

galumay · 12 January 2017

RandomInvestor said:
Ah ok I was thinking of buying Sirtex it seems undervalued it has dropped over 50% surely its undervalued now and its a very solid company.

Really? What made you suddenly jump from asking about Apple's financials to thinking of buying Sirtex?

Just because a share drops 50% does not mean its undervalued, it means its price has dropped by 50%, nothing more and nothing less. You need to get the ideas of price and value clearly differentiated in your mind!

What do you mean by "its a very solid company"?

I really think you should spend some more time on self education before you start throwing your hard earned cash at the share market.

mcgrath111 · 12 January 2017

RandomInvestor said:
Ah ok I was thinking of buying Sirtex it seems undervalued it has dropped over 50% surely its undervalued now and its a very solid company.

Just because a company has dropped 50% doesnt mean its undervalued.
Read the annual report, tell me about the different sir spheres (or whatever they are, I don't own srx, but someone who does will be able to correct me)
Why has it dropped 50%?
Read the annual report / asx announcements & any info that you can get your hands on.
Some people will say undervalued, some will say it has further to fall.
I could say yes, its undervalued because of growth potential etc. & comsec says strong buy, but try to dig deeper into the question.

Just my 2cents, im quite similar in my journey to you, so take my advice with a grain of salt.

mcgrath111 · 12 January 2017

galumay said:
Really? What made you suddenly jump from asking about Apple's financials to thinking of buying Sirtex?

Just because a share drops 50% does not mean its undervalued, it means its price has dropped by 50%, nothing more and nothing less. You need to get the ideas of price and value clearly differentiated in your mind!

What do you mean by "its a very solid company"?

I really think you should spend some more time on self education before you start throwing your hard earned cash at the share market.

Hahaha you must have posted while I was typing.
We said similar things, perhaps Im learning from your advice

luutzu · 12 January 2017

galumay said:
Really? What made you suddenly jump from asking about Apple's financials to thinking of buying Sirtex?

Just because a share drops 50% does not mean its undervalued, it means its price has dropped by 50%, nothing more and nothing less. You need to get the ideas of price and value clearly differentiated in your mind!

What do you mean by "its a very solid company"?

I really think you should spend some more time on self education before you start throwing your hard earned cash at the share market.

He did say "it seems undervalued".

It is true what you and McGrath is saying that just because a company has dropped x% does not mean it is undervalued... but it certainly "seems" to be. Worth a real hard look I'd say.

And Dialupp isn't wrong about thinking that it seems to certainly be a quality business either.

RandomInvestor · 12 January 2017

galumay said:
Really? What made you suddenly jump from asking about Apple's financials to thinking of buying Sirtex?

Just because a share drops 50% does not mean its undervalued, it means its price has dropped by 50%, nothing more and nothing less. You need to get the ideas of price and value clearly differentiated in your mind!

What do you mean by "its a very solid company"?

I really think you should spend some more time on self education before you start throwing your hard earned cash at the share market.

When I say solid companies I am referring to their financials.

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