Debt Capacity Bargain (DCB) is a technique by which you can find the sustainability of company in long term or how strong it's economic moat is?
It needs to be calculated as per the below steps :-
1. Calculate the avg. operating cashflow using last 5 yrs data or Buffett’s Owner’s Earnings (Cash flow from Operations – Capex +/- Changes in Working Capital).[Both will give you different result but suggest to calculate both for better understanding of the stock]
2. Use a desired interest coverage ratio of 3x-5x (Prof. Sanjay Bakshi recommends 3x for highly stable businesses, 5x for cyclical businesses). I use 5x for all, just to be extremely safe.
3. Divide Avg. Op. Cash flow/Interest coverage to find out what is the interest expense that the company can service.
Interest Expense = Avg Operating cash flow 5years/5
4. Divide the interest expense arrived at in Step 3. into the current interest rate to determine debt-capacity of the company; SBI’s AAA bonds were issued recently at 9.5%. Let us be conservative and take an interest rate of 12.5% (a 15% would be even more conservative, for a company having debt devide it by 30% if you are looking for a turnaround) to find out Min. value of business.
Min. value of business = Interest Expense / 0.3
5. The enterprise value should be found for the company by subtracting the Debt and adding up the cash available at the previous year end from/with the Min. value of business.
Enterprise Value = Min. value of business - Debt +Cash end of last year + Equity Value
6. Compare this debt-capacity with the current market cap, and if the Market Cap is less than Debt-Capacity, we can consider buying the stock.
Enterprise Value > Market Capitalization
http://fundooprofessor.blogspot.in/2005/11/one-valuation-rule-two-paradoxes.html
It needs to be calculated as per the below steps :-
1. Calculate the avg. operating cashflow using last 5 yrs data or Buffett’s Owner’s Earnings (Cash flow from Operations – Capex +/- Changes in Working Capital).[Both will give you different result but suggest to calculate both for better understanding of the stock]
2. Use a desired interest coverage ratio of 3x-5x (Prof. Sanjay Bakshi recommends 3x for highly stable businesses, 5x for cyclical businesses). I use 5x for all, just to be extremely safe.
3. Divide Avg. Op. Cash flow/Interest coverage to find out what is the interest expense that the company can service.
Interest Expense = Avg Operating cash flow 5years/5
4. Divide the interest expense arrived at in Step 3. into the current interest rate to determine debt-capacity of the company; SBI’s AAA bonds were issued recently at 9.5%. Let us be conservative and take an interest rate of 12.5% (a 15% would be even more conservative, for a company having debt devide it by 30% if you are looking for a turnaround) to find out Min. value of business.
Min. value of business = Interest Expense / 0.3
5. The enterprise value should be found for the company by subtracting the Debt and adding up the cash available at the previous year end from/with the Min. value of business.
Enterprise Value = Min. value of business - Debt +Cash end of last year + Equity Value
6. Compare this debt-capacity with the current market cap, and if the Market Cap is less than Debt-Capacity, we can consider buying the stock.
Enterprise Value > Market Capitalization
http://fundooprofessor.blogspot.in/2005/11/one-valuation-rule-two-paradoxes.html
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