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Question on Net Debt per Share in Advanced Margin of Safety calculations

QuestionsCategory: Valuation QuadrantQuestion on Net Debt per Share in Advanced Margin of Safety calculations
Ivan asked 7 years ago

Hi Rusmin,
Using your calculations for advanced margin of safety, i encountered a funny problem.
For example:
Company A holds a large amount of cash and rent their business premise. Because of this, they are at the mercy of the landlord increasing the rent, etc.
Company B is in the same situation and decide to buy their own building. Therefore, their cash position decrease and hence the advanced margin of safety decreases.
In my opinion, Company B is theoretically a better company because of a less risky business position. However, this is not captured in the valuation. What do you think?

4 Answers
Rusmin Ang Staff answered 7 years ago

Hi Ivan,  
 
I see where you are coming from. Hypothetically, Company B deserves a higher valuation :) 

Ivan answered 7 years ago

Hi Rusmin,
Do you think there is a way capture this in the formula? Lol.

Rusmin Ang Staff answered 7 years ago

Hi Ivan,  
 
We do not see the full value of Coca-Cola’s brand equity value (worth billions!) captured on Coke’s books. So it is really difficult to quantify the qualitative aspects of a business. Generally, from my experience, the market usually prices remarkable businesses like this at a premium.  
 
That being said, assuming the similar example, Company B should report a higher net profit margin since they have lower operating costs from using its own building. Theoretically, investors should see higher profits in the income statement :)

Ivan answered 7 years ago

Thanks! That’s a useful insight!