Hi, I have a two questions regarding operational leverage: in your note (see below) you state that op income and EPS is growing faster than revenue. Is that based on CAGR? Second quest: Can you use Free Cash Flow instead of EPS? According to Maubossian et al book, Expectations Investing, "Earnings do not recognize the cash outflows for investments in future growth". How would that affect operational leverage? (Please forgive my limited knowledge of Finance in asking this question). Thanks Ann
Mauboussin, Michael J. . Expectations Investing (Heilbrunn Center for Graham & Dodd Investing Series) . Columbia University Press. Kindle Edition.
Valuation Metrics:
PE: 38; EV/EBIT: 37; FCF Yield: 2.64%
Note: Op. income and EPS growing faster than revenue, suggesting that Lifco has operating leverage. The business is highly rated.
1. Yes, that is based on CAGR. Seeing a company increase its FCF, earnings, and/or operating income more than its revenue shows increasing margins and in most cases operating leverage.
2. Yes. There are pros and cons of using both, but I like per share as it then accounts for dillution (If the business issues shares to fund growth etc.), and I also prefer to use FCF per share. However, you should then also adjust the FCF for one off expenses or cash flows. Additionally, you could also subtract "growth capex" from the formula, as it gives a better view of the "owner earnings". In FCF we are looking to subtract the maintanace capex, and not what is reinvested into the business. If a business has a high ROIC, $1 invested will be worth more than $1 in the future.
Thank you. for your explanation. I so appreciate your time you are investing in analyzing these companies companies. I am now trying to analyze Hexagon, using your layout of lifco. Ann
Which broker allows you to invest in LIFCO? I have looked at e-Trade and TD Ameritrade and neither shows any data.
Im not US based. But Ive been told Interactive Brokers offer Swedish equities.
Thanks!
Hi, I have a two questions regarding operational leverage: in your note (see below) you state that op income and EPS is growing faster than revenue. Is that based on CAGR? Second quest: Can you use Free Cash Flow instead of EPS? According to Maubossian et al book, Expectations Investing, "Earnings do not recognize the cash outflows for investments in future growth". How would that affect operational leverage? (Please forgive my limited knowledge of Finance in asking this question). Thanks Ann
Mauboussin, Michael J. . Expectations Investing (Heilbrunn Center for Graham & Dodd Investing Series) . Columbia University Press. Kindle Edition.
Valuation Metrics:
PE: 38; EV/EBIT: 37; FCF Yield: 2.64%
Note: Op. income and EPS growing faster than revenue, suggesting that Lifco has operating leverage. The business is highly rated.
Hello Ann, thanks for your question(s)!
1. Yes, that is based on CAGR. Seeing a company increase its FCF, earnings, and/or operating income more than its revenue shows increasing margins and in most cases operating leverage.
2. Yes. There are pros and cons of using both, but I like per share as it then accounts for dillution (If the business issues shares to fund growth etc.), and I also prefer to use FCF per share. However, you should then also adjust the FCF for one off expenses or cash flows. Additionally, you could also subtract "growth capex" from the formula, as it gives a better view of the "owner earnings". In FCF we are looking to subtract the maintanace capex, and not what is reinvested into the business. If a business has a high ROIC, $1 invested will be worth more than $1 in the future.
Thank you. for your explanation. I so appreciate your time you are investing in analyzing these companies companies. I am now trying to analyze Hexagon, using your layout of lifco. Ann
I'm glad you enjoy my writing! And I appreciate your questions, keep them coming :)