In those days, working capital belonged to the shareholders.

If the employees were no longer useful, you just sacked them all, took the working capital, and stuck it in the owners' pockets.

That was the way capitalism worked

Nowadays, of course, the accounting is not realistic

@dollarsanddata In early 2000, a company where I used to work wanted to go public. The investment bankers looked at the numbers and said, YOU ARE PROFITABLE?! ARE YOU CRAZY? YOU CANNOT IPO UNLESS YOU ARE LOSING MONEY.

I’m paraphrasing, but not by much.

The company dutifully piled on huge expenses so it could lose money.

Then the IPO window closed when Nasdaq imploded.

The company was never the same again.

1/ Howard Marks once said that before buying an asset, above anything, he wants to know “the amount of optimism that’s in the price.”

All investors can do this with a handy tool: The Reverse DCF.

I'll also leave a download link to my compact DCF Model at the end of this thread.

2/ We all know a regular DCF. But's what a "Reverse DCF"?

If we consider that a DCF is a Linear Equation, we could say the 'X' (The unknown variable) is the Intrinsic Value.

In a Reverse DCF, we start with the Market Price and try to find some other variable, say Sales Growth.

3/ Let's start by taking an example: VST Industries, a Cigarette-maker based in India.

I valued them on my blog a while ago. I'll be retaining the old assumptions, but using the latest financials.

So please note that the Valuation isn't accurate

4/ This is a "Regular DCF" of VST Industries. The Assumptions I've made indicate an Overvaluation.

The Intrinsic Value is Rs. 3,012, but the Market Price is Rs. 3,492.

Let's not dwell on whether this is correct, since we discussed earlier that this isn't an accurate Valuation.

5/ If we want to do a "Reverse DCF" instead, we need to pick a different variable to 'find'. Say, I will pick the Sales Growth numbers.

I will now remove the Sales Growth numbers from the Model and assume that Sales Growth is the same across the years for ease of calculation.

@soicfinance @suru27 Indeed. For later, industry/sector has to be within your circle of competence to judge the turnaround correctly.

Because according to Warren Buffett
"Both our operating and investment experience cause us to conclude that turnarounds seldom turn"

While Financially Analyzing Businesses (esp Small Leaders), this is THE Order:

- Cash Flow Statement (Focus on Operating Cash)
- Cash Position

- Balance Sheet Strength
- Never Miss Receivables

- P&L

Cash >> Balance Sheet >> Finally P&L

#FI

A reminder of rule number one from @mjmauboussin