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David is CEO of New Constructs (www.newconstructs.com), an independent research that specializes in unearthing key insights from the Financial Footnotes of Annual Reports. Having analyzed over 50,000 annual reports and their Financial Footnotes, New Constructs research regularly produces Hidden... More
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  • Definition: Price-To-EBV, Or Price To Economic Book Value Ratio 3 comments
    Aug 7, 2012 2:58 PM | about stocks: WMT

    The price-to-economic book value ("Price-to-EBV") ratio measures the difference between the market's expectations for future profits and the no-growth value of the stock. Economic book value ("EBV") is our measure of the no-growth value of a stock.

    When stock prices are much higher than EBVs, the market predicts the economic profitability (as distinct from accounting profitability) of the company will meaningfully increase. When stock prices are much lower than EBVs, the market predicts the economic profitability of the company will meaningfully decrease. If the stock price equals the EBV, the market predicts the company's economic earnings will stay the same into perpetuity.

    EBV measures the no-growth value of the company based on the current Net Operating Profit After Tax (NOPAT) of the business. It is also known as the "pre-strategy value" of the company because it focuses only on the perpetuity value of the current NOPAT or cash flows.

    As an example, in Blue Light Special on WMT, I explain how Wal-Mart's valuation went from Very Dangerous in the late 1990s to Very Attractive recently. This change occurred as the stock remained flat while the cash flows (NOPAT) increased substantially. Figure 1 from my article, below, compares the EBV per share of Wal-Mart to its stock price.

    The Formula for EBV is: (NOPAT / WACC) + Excess Cash + Unconsolidated Subsidiary Assets + Net Assets from Discontinued Operations - Debt (incl. Operating Leases) - Value of Outstanding Stock Options - Under (Over) funded Pensions - Preferred Capital - Minority Interests. EBV per share equals EBV divided by shares outstanding.

    Disclosure: I no longer have a position in WMT. I receive no compensation to write about any specific stock, sector or theme.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: WMT
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Comments (3)
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  • Starman1
    , contributor
    Comments (19) | Send Message
    Hi David The ignition switch defect at GM causing 313 deaths is sure to affect stock values and may have GM stockholders switching to Ford. What do you think about that?
    Carl Spletzer Selma Oregon.
    14 Mar 2014, 10:57 AM Reply Like
  • David Trainer
    , contributor
    Comments (1185) | Send Message
    Author’s reply » Starman1:


    Not sure if you you meant for that comment to be on this article: http://seekingalpha.co...


    Either way I agree. The struggles of a prominent competitor like GM might have stockholders, and, more importantly, consumers switching to F.
    14 Mar 2014, 11:10 AM Reply Like
  • David Addison
    , contributor
    Comments (243) | Send Message
    Why does you use WACC for a discount rate? Shouldn't a discount rate reflect the expected rate of return of an equally as risky investment? When evaluating capital budgeting scenarios, you discount at the opportunity cost. How does WACC, the cost of raising maintaining debt and equity, reflect opportunity cost?


    14 Aug 2014, 02:57 AM Reply Like
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