Like I said, use whatever criteria you want. But you obviously missed my purpose for using my hypothetical. I did NOT choose the hypothetical because I think it is likely (I absolutely do NOT think it is likely). I chose it because it was an EXTREME situation that increases the size of movements in the numbers to make the movements easier to see. The sole purpose of the hypothetical was to show that EBITDA could go UP while the value of the company goes DOWN. Therefore, one should not use EBITDA blindly but must look behind the number in order to #$%$ whether it has value or not in the case at hand.
In any event, it is clear that you do not wish to even question what others have offered as measurements of value. So go right ahead and rely on them. I ask this question, though. If nearly everyone agrees with the commonly expressed valuation methodology, why didn't the share price move long ago where those valuation metrics indicate?
Waht about Price to Sales ratio.
Rger is 1.7x
Smith is 1.1x
Thats another VERY valid metric. Very meaningful in light of the company's margins AND growth. SMITH isn't getting enough credit in the PPS for its sales either. Its time to turn the assets over to another management team, since this management team doesnt have the mind to think of how they could invest $100 million in cash.
You created a hypothetical scenario that could pose a problem with a current analysis of what we know to be true today. Anyone can create a hypothetical scenario to foil any analysis.
Feel free to pose your hypothetical scenario to whoever you wish. I'm not inclined. I don't think SWHC will be making any significant acquisitions. They may soon be hiring consultants to assist in negotiating maximum value in a private takeover. I think that hypothetical scenario is more likely than the one you present.
There is nothing wrong with calculating any number in any manner or formula. The only limitation is that one must avoid arithmetic mistakes. But USING a number to make a determination of value (or an estimate of what the market should or will eventually value something at) is another matter. For that purpose, the measurement formula must have validity for that purpose. Share valuations made by using a P/E calculation without then adjusting the value for cash on hand are simply not valid. If you want to ignore the cash aspect, go right ahead. You will simply arrive at incorrect values whenever the cash on hand is of material size.
The same is true is you blindly use EBITDA based value calculations. You must look behind the EBITDA number or you may arrive at false values. I think my example of the grossly overpriced acquisition below demonstrates that clearly. The EBITDA increases in a situation where it is obvious that the value of the company decreased. But I do not expect you to agree with me. I have readily acknowledged my inability to persuade. Why don't you put my example to someone whose thinking you respect and see what their response is. Even though most of the people on this board are so biased by their hopes for higher share price that they accept only statements that support their hopes, nevertheless, some of them are intelligent. You like equity_360. Put my example to him. See if he can defend to your satisfaction the blind use of EBITDA based calculations for valuation purposes. Or you could ask the truly stupid board member who gives opposite thumbs indications for the same statement depending upon who says it.
Fine. You are certainly free to do your evaluations and decision making using other people's muddled analytical metrics.
You have also expressed your admiration for equity_360's analysis under the other topic. Be careful. The metrics he employs are useful. But they are not determinative. Especially EBITDA. Consider the following extreme scenario to make the point.
Suppose SWHC acquired some parts of Freedom. Suppose those parts had earnings of $25 million / year. Suppose SWHC was able to borrow to buy it (since they just paid 6% for 3 year money, I presume 10 year money would cost them at least 8%). Now suppose SWHC overpays substantially for the acquisition by paying 40 times earnings (borrowing $1 billion). What would happen to the various metrics?
SWHC earnings would increase by Freedom's $25 million but decrease by SWHC's $80 million interest cost. Thus there would be a net decrease to SWHC earnings of $55 million. Also,SWHC's balance sheet would be severely compromised. I am sure you would agree that SWHC is worth less after the acquisition because they overpaid so much. But what would happen to EBITDA? It would go HIGHER (because the interest that SWHC would be paying is excluded from the calculation). Equity's analysis would raise SWHC's share value while in fact it went lower. Again, EBITDA is a useful tool for evaluating a company, but it is not determinative. And it doesn't become determinative even if you hear it discussed a million times by everyone else.
When the P/E for the S&P 500 is calculated, they do not account for the cumulative cash on hand for the 500 companies. They simply don't. No matter how much you scream about how cash on hand is taken into account in the calculation of the P/E, it just isn't.
I have NEVER heard a statistic given for the total cumulative cash on hand for the 500 companies in the S&P 500. I hear about the P/E multiple for the S&P 500 all the time.
You also brought up Apple in your last post as support of your position. They do NOT discount Apple's $140/share from the stock price when calculating its P/E. It is very rare that I hear someone say the "P/E ex-cash" when discussing Apple, or any stock.
Look, for most companies the cash on hand is relatively small so they ignore it in casual discussion. When it is not small they don' ignore it. Apple is a case in point. Apple's cash is equal to about 25% of its share price. The cash on hand for SWHC is also huge. At $75 million that about 12% of share price.
Obviously I never would have made it as an Economics professor teaching a bunch of freshmen. My teaching abilities are about on par with those of 95% of the public school teachers in America. That is why the public schools so such a poor job.
The extreme example below illustrates the principle which applies to EVERY company, All of the common shorthand ways of discussing various metrics do not change the operating principle. No matter how many times you repeat an inaccuracy it does not make it accurate.