Column L – Cash Per Share

Cameron : Column L is how much cash per share the business is generating. We are just dividing the net operating cash flow by the number of shares on issue, which tells us how much cash per share they’re generating. I guess that’s a good one to talk about the coffee shop analogy, Tony.

Tony¬†: Yeah. Let’s say we’re thinking of investing in a coffee shop. So, before we invest, we want to know just how much cash the coffee shop generating. We know in terms of operating cash flow, if we’re using the strict accounting definition, how much money is coming in from selling coffee and food, less the cost of collecting that money, which are mostly the wages of the staff who are doing that collecting. It’s a fairly simple calculation. But if there are ten partners in the coffee shop, we’d have to divide that operating cash flow up according to the number of shares. And that’s where we get to our share of the cash flow coming in.

Cameron : And let’s talk about why we want to know that. My understanding is, if we’ve got a coffee shop, and I’m going to pay a hundred thousand dollars for the coffee shop, we’re starting to work out how long it would take before the business could bring in enough money to neutralize the money that I had to fork over with to buy the business in the first place.

Tony : Yes, that’s right. So, whilst acknowledging it’s a rough and ready calculation, because we’re not taking into account any of the other profit and loss items like depreciation and how often we have to turn over the cappuccino machine and things like that, but a rough and ready calculation of how long will it take for me to get my money back.

Cameron : And this is about trying to minimize our risk. Buffet talks about having a safety margin and a buffer, and what we’re trying to do here is determine what level of risk we’re looking at. Is it going to take me two years for the business to return my initial investment, or might it take 10 years or 20 years.  When you look at some technology stocks, it might be 50 years to return my investment.

Tony : Yeah, and if you were tempted to pay 50 years for a coffee shop, you’d want to have a fair idea of how it was going to grow. Maybe it was a franchise of five coffee shops and you were going to franchise it out to be a hundred or something like that. But if we’re just buying the regular, run of mill down the road coffee shop, then yeah, we want to have a quick return on our money, basically.

Cameron : I mean, to wait 50 years to get my money back, that coffee shop would want to have a little room out the back where I got additional benefits over and above the coffee. Coffee with a happy ending, that’s what their coffee shop would have to be, I’d call it “Happy Ending Beans”. 

Tony : Or “The Bada Bing Coffee Shop”. 

Cameron : Yes! That’s one for Soprano fans. All right. So that’s our cash per share column.