Forum Archive Index - November 2000

["Warner Lamb" <cloud9@i4free.co.nz>]

Hi Brian, Why is it a problem if Goodwill is large compared to NTA. If that
goodwill produces cashflow but doesnt need huge capital to produce it. Lets
take a look at our two most sucessful companies of late and who the market
rate very highly.

WHS. Price: $6.78 NTA 0.58c EPS 24.3c  If the warehouse were sold tomorrow,
it's reported tangable assets are less than 10% of its value, why is it
important to write down goodwill to get a truer picture of company
performance?. I have noticed that our best performing companies seem to
produce excellent earnings with the smallest NTA. The ratio of EPS to NTA
also is interesting. The WHS produces 24.3 cps earnings from reported
tangable assets of 58c.

BCH. Price: $11.35 NTA 0.49  EPS 20.3   The same situation again. Baycorp
are even more extreme, with tangable assets that are less than 5% of current
value. Baycorp earns 20.3 cps from  49cps in tangible assets.

On the other hand we have CAH. They just reported their best earnings for
quite some time.

CAH. Price: $1.85 NTA 267c EPS 18.5c
So with 267cps in assets to maintain/replace CAH only produced a 18.5cps
return on those assets. This was a Good result, but you can see the market
values them below NTA.

ADV and RMG will never have tangible assets close to market value because of
the nature of their businesses.
All businesses are purchased for their companies future earnings whether
they are capital intensive or information intensive,
I dont think that because intangables are to be written of against earnings
that it is a problem as such because if those intangables have been
purchased for tangible cashflow and not hard assets, what is the difference
as long as they are producing earnings?

Maybe in ADV case some goodwill was very high and maybe not producing any
earnings yet..I dont know, and these bussinesse may be purchased for
"possible" future earnings. This may be a problem for sure.
RMG have integrated some companies that have been operating for over 80
years and were already earnings positive so maybe this type of goodwill is
more "tangible".

I do understand the non tax deductable bit, but Buffetts theory has proved
itself in our market lately.....tangible assets or no tangible assets! This
was one of the reasons he hated airlines.

R
Warner


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