The Voice of Moderation, Reason & Ultimate Accounting Truth
Quote:
Originally Posted by
Harrie
Morningstar's number for freedom looks like they exclude inter company revenues. With this included the price sales or the revenue multiple is more like 3.5 times...
Always eliminate from the numbers inter-company revenues (where one part of the organisation sells to another part of the same organisation).
So Freedom Foods quote a none proper sales value in their FY2014 report:
$122M7 of Gross Sales Revenues ("includes revenues from the group associate entity The a2 Milk Company. It also includes intercompany revenue").
If you actually look you will also find in the report such pukka values as:
$87M9 Net Sales Revenues and
$16M8 Intercompany Sales Elimination.
So you can take the the $16M8 from the $122M7 and get
$105M9 as combined sales for Freedom Foods and 17.7% of A2Milk net sales (cos Freedom own 17.7% of a2).
Use That.
Best Wishes
Paper Tiger
And now for some actual truth and reason
For the newies, for whom I feel genuinely sorry for in this misguided debate,
Price sales ratios are not a method of valuation, they are merely just one of several metrics available on any particular company. They look down the income statement only as far as the top line and it is a forward assessment of bottom line estimates that determines a company valuation.
If two growth companies have exactly the same price sales ratio it does not mean that they have the same relative valuation. Consideration of gross and net margins is essential in valuing companies.
If one of those two growth companies will mature with a gross margin of 20% and a net margin of 2%, and the other will mature with a gross margin of 80% and a net margin of 15%.
Then, the latter will have much greater long run free cash flows, will be significantly more profitable in the long run, will have a much higher valuation, and will likely have a much higher market capitalisation as investors and the market tend to price in those cash flows ahead of time on a risk/reward basis.
Thus, it is the long run free cashflows that value a company, not individual metrics alone, and that is why professional analysts defer to DCF as a primary tool in assessing forward valuation and in evaluating sensitivity analysis.
Those whom may say that you can tweak a DCF to tell you anything are mostly the ones who have not the applied business experience, or are simply not doing it right, or are not forming a sensible base case, or are generally the manipulative on this forum.
Apologies if this sounds like valuation 101.
Kind regards, Mac