Except I guarantee that the EBITDA you're using is trailing 12 months. Thus it doesn't represent any future cash flows, but previous ones.
you just did an entire 180 from not 3 sentences earlier. Also, capex is required to produce a certain level of cashflow. You can't ignore it, no matter how hard you try these mental gymnastics
Yeah no shit. I never said it represented future cash flows...just that I was using it as a basis for one. You can only assume future cash flows because they haven't happened yet... There are tons of companies with very drastic changes in capex YoY depending on projects they start or don't (MSFT probably doesn't fall in this category). I'm not saying that I wouldn't include Capex in my model...but at this stage of the game (30 secs in) I'm not really going to concern myself with investments the company is making in their business. I am assuming that management is going to take on projects that have a higher IRR than the stocks earnings yield (yay correct words). Big assumption I know, and it doesn't hurt to look at ROE (BV for clarification) to see if their is a huge variation (being a value investor their usually isn't). With this assumption (Please note I am calling it an assumption) the effect of capex on a valuation shrinks dramatically. At this stage of the game I haven't evaluated management so I assume they are rational and investor oriented, and would make investments with a positive NPV based on my required return (earnings yield). If this assumption proves to be correct then not including capex would actually be more conservative (I am only going to expect 6% return on MSFT, but if management continually invests in projects with higher than 6% return then my future cash flows are going to be more than I expect). Capex is just another investment, and as long as management invests in projects that give enough return...I'm ok with it, becasue long-term its gonna give me a better yield. But they often don't... so yes. Later on in the analysis It would be a factor to consider. But at this point** I know nothing about managment, the direction of the company, or investments on the horizon**....so capex is just noise. This approach doesn't work well for short-term investing for obvious reasons...but I don't do that...
I'm not saying it's not important and that It shouldn't be considered...because it would be stupid not too, but we are making assumptions about the future. So in my mind Keep It Simple Stupid. Assume management is on your side until proven otherwise...either using historically data or something else.
There's no point in calculating "cash flows" if it isn't "free cash flows." But don't take my word for it, this guy might know a thing or two also.
No point? Don't be silly. Only the Sith deal in absolutes.
I'm sure that's just the booze talking.
Sober for over a month. Thanks for the support.
No, it was "ROE (MV)." Don't spin it like it was a simple syntax error. Also, your inability to understand that the market cap has zero bearing on how leveraged a company is is indicative that you don't know much about financial analysis.
I will. It's still a "return" on the market value of "equity." Ever hear someone say "Hey! Whats the return on that bond?" or "How much return did you get on your stock?" You are splitting hairs with vocabulary. Just because your book calls it something doesn't mean that's the only thing you can call it.
Income = Earnings Sales = Revenue Return = Yield
Just because it was different doesn't make it wrong. If you are so fucking set in your ways that you can't tolerate a little variety then you are gonna have some trouble down the road. I knew it would throw people off...That's why I noted that it was market value and not book value. I'm sorry I didn't run to my finance book to make sure I was using the exact correct term. Get over it.
Also assuming I don't know what market cap is? really man? really?
So you don't give a shit about previous capex, but have a model that is surely predicated on levels of capex. Amazing.
Lol...in a sense....I wouldn't say I have a model dedicated to previous capex...My dividend/residual value models factor it in through the change in book value YoY. My free cash flow one just has it as a line item and I project it out using historical growth rates or some other assumption. I take Capex in to account when I am trying to get an actual price point. But no. I don't pay it much attention until then. Definitely not when I am deciding if I should research the stock.
While I have thoroughly enjoyed nit picking each other's posts apart. And I'm sure you are going to tear this one apart. (Half the shit I said up at the top about Capex, while still valid, was just to be a dick)...I am afraid this is my last response. This has been a fun critical thinking exercise, and I really appreciate the caliber of your response despite them being so narrow focused/black and white. I have to get to bed so I can function at work tomorrow. Good job for knowing your shit. Night.