Tuesday, February 16, 2010

"Stack the cash flows" to see if you're being paid back in a timely fashion (IBM, CSCO, Q, AOL, GPS)

Below is a useful way to evaluate the "payback" period when giving your hard-earned capital to a company.

There's a right price for almost everything, including the cash flows of weak companies.  They key is to pay the right price for them.  For IBM below, if you bought the company outright - net of cash on the balance sheet - you'd be paid back and playing with "the house's money" by 2018.  For a dismal situation like AOL, you'd be paid back sometime in 2012.  Stacking up your investments' cash flows and payback periods  - at least for me - is a way to graphically look at how reasonable you're being with your return assumptions.

Copyright 2010 AlphaNinja

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