Jakarta, CNBC Indonesia – For those of you who are already involved in stock investment, you may often use the price to earnings ratio (PE Ratio) and price to book value (PBV) valuation methods. However, don’t forget that there are other methods that can be used and are quite interesting for you to try, and can predict when you will return your investment.
This method is EV/CFO or the method of comparing enterprise value and operating cash flow. EV/CFO will give you an idea of when you will return your capital when someone acquires this company.
For example, if the value is 10, it will take 10 years to return the investment. Meanwhile, if the result is zero point, then investors have the potential to return their capital in less than a year.
The following is a complete explanation of the EV/CFO method that you should know.
Enterprise Value (EV)
EV is the company’s current value. To find the EV value, you can use the formula:
(Market cap + bank debt) – cash and cash equivalents
EV is very appropriate for someone who really wants to acquire a company because EV includes a debt component in it.
When we acquire a company, we will of course assume all of the company’s debts and hold current assets in the form of cash that are our rights.
Assessing a company via EV is considered quite more accurate than just via market capitalization (market cap). Because if we only focus on market capitalization, market cap is very much influenced by the price and number of shares in circulation.
Operational cash flow
Operating cash flow is cash flow generated from a company’s operational activities in a certain period. You can of course find information regarding the value of operational cash flow in annual or quarterly financial reports.
Cash inflow is cash receipts from customers for sales of goods and services. Meanwhile, cash outflows are all payments to suppliers, employee salaries, other payments related to operations.
Negative cash flow indicates greater operational expenses than sales to customers. Vice versa, if it is positive then the company’s operations are considered quite good.
Cash flow is a component that is quite tangible in assessing whether the company can actually record sales or vice versa.
Because net profit consists of many components. It is possible that a company records a net profit because it sells assets and its operational cash flow is minus.
EV/CFO calculation simulation
Now let’s carry out a stock valuation calculation simulation using EV/CFO.
Let’s say, in company A’s financial statements, the values below are recorded:
Market capitalization IDR 525 billion
Bank debt Rp. 11 billion
Cash IDR 432 billion
The three-year average operational cash flow reached IDR 187 billion
The Enterprise Value of this company is:
(Rp. 525 billion + 11 billion) – Rp. 432 billion = IDR 104 billion
The EV/CFO value of this company is IDR 104/IDR 187 billion = 0.6 times. This shows that the capital costs used by investors to acquire the company can be returned or paid off in just six months, referring to the conditions in the last financial report.
In essence, the lower the EV/CFO the better because it indicates how quickly you return on investment.
What is the use of PER and PBV if there is EV/CFO?
The existence of EV/CFO does not necessarily replace PER and PBV. PER and PBV are still very useful for measuring historical share prices if they are based on earnings and book value.
PER and PBV can certainly be a reference regarding when is the right time for you to buy these shares.
Hold GOTO CS Shares? If you don’t know this, it could be dangerous