No problem. It's a methodology that i use frequently to get a sense for true trading discounts/premiums to operating assets, which i find to be vastly superior to more commonly used metrics such as NTA/NAV multiples, because:
1) It strips out effects of capital structure. A point poorly appreciated (i think) by the general investing public with the use of NAV/NTA discounts is that this metric doesn't adjust for capital structure. Say i have two identical companies, each with $100 of assets, but company A has $20 of liabilities (therefore $80 of equity) whereas company B has $80 of liabilities (therefore $20 of equity). Let's say the market value of company A is $40, and the market value of company B is $10. In this case, both companies are trading at 50% discounts to their NAV, so the NAV/NTA premium would say they're as cheap as each other. Is that right? Absolutely not, and here's why - the liability side of the balance sheet is always dollar-for-dollar, but the market is really valuing the asset side of the balance sheet only. So, A has $100 of assets but is trading at a $40 discount to equity value, therefore its assets are in fact being discounted by 40%; however, B has $100 of assets but is only trading at a $10 discount, so its assets are in fact being discounted by 10%. Therefore, the conclusion would be that, although both A and B are trading at the same discount to equity value, A is in fact the much cheaper company because it is less levered than company B.
2) Not only does it remove the effects of capital structure, it also focuses the attention on the operating assets of the business you want to value. IMF, for example, holds a lot of cash and a few other bits and pieces like receivables etc., all of which are easily converted $1-for-$1 - it's not as though the market is ascribing a premium to IMF's cash on balance sheet. So, the object of the exercise is to focus the entire delta between the market cap and the balance sheet value, on the operating assets of the business that the market is in fact valuing which, in IMF's case, is its litigation book.
Hope that helps.
Expand
I do like...
