Those looking for value are buying into companies with high solvency, low gearing and revenue growth. Although it’s easy to check whether revenue is still growing for a company, there are several methods of analysing solvency and gearing. The easiest approach would be to use some sort of filter such as those provided by KLSETRACKER, which allow an investor to filter companies in terms of their cash, current or quick ratios and leverage or debt ratios. I won’t go into them in too much detail, except to state that solvency ratios are slightly different ways of comparing the current liabilities of the company with either its cash (and near cash) assets or ability to generate cash. This provides a good glimpse into the length of time a company wil survive if it suffers a shock to its revenue stream. In relation to leverage or debt ratios, these show how much debt a company has and hence the likelihood of being made bankrupt if its balance sheet or revenue stream decreases.

On top of these ratios, which any long-term investor must know, I would like to introduce another ratio, which is called the Enterprise Value-to-cashflow ratio. Very generally the “Enterprise Value” is how much it would cost to buy a company, and when you compare that to its operating cashflow you get a general idea of how long it would take to cover back your investment. Enterprise Value can be calculated roughly by just adding the market cap to total debt of a company and then subtracting that from the cash of a company. This means that if an investor wanted to buy an entire company, it would have to buy all the shares in the market and take on the debt which the company has. As it also becomes the owner of the cash owned by the company, this is used to deduct from the market cap + debt amount. Then, by dividing this sum by the operating cashflow you will end up with a ratio that tells you how long it will take for the company to earn back what you paid for it.

The important thing to realise about this ratio is that it is based on market cap and is therefore dependant on its share price. It is therefore a measure of the value of the company (like the P/E). The lower it goes, the lower the ratio will be.

As an example, I have applied this equation to 3 companies: Notion, DIGI and GENTING. Notion scores a 5, DIGI scores a 9 and GENTING scores an impressive 3. As you can conclude, GENTING is the clear winner of this analysis due to its high cash position and cashflow. Taken into conjunction with its low gearing and revenue growth I therefore believe that Genting continues to be a good buy, despite the punishment which foreign investors have meted out to it following the recent woes in the gambling industry (just do a google search for ‘Macau + job losses’ to see what I mean).