I remember dismissing Wincanton completely out of hand last time I looked at them, and two major things have changed since then - firstly, their recovery seems more assured. They've released a good year's results, for example, that prove that previous management rhetoric about the potential of the streamlined group wasn't all up in the air. Secondly, though, their share price has surged forward - albeit off of a low base. You'd have more than doubled your money if you completely ignored what I said the first time. This is often the way with heavily leveraged stocks, though; a small change in operating assumptions makes for enormous changes to the business's valuation if its effective is amplified by a high level of debt.

As I leafed through their results and caught up with the ubiquitous logistics and supply chain management company, something came to mind that didn't particularly occur to me the last time. I'll do a quick run through of my 'normal' way of valuing a company, and then finish on the particular problems Wincanton poses.

What is a business worth?

A business is worth the value of its discounted cash flows - the amount of money it can pay out to its investors. Some investors like using dividend yield as a proxy for this - I don't. Dividend yield is irrelevant to me, because it focuses on the wrong thing; what we should be looking at is the company's underlying cash generation, not how much it's currently paying out to investors. Companies with high dividend yields often have a very unattractive characteristic for investors - they lack the ability to profitability grow. They're paying out their profits because prospective returns are low; they cannot compound investors' capital effectively. Rather, I prefer businesses who want to keep their capital because they deploy it effectively in making more money in future years. In short, as I've said before, Return on Capital is the metric to be focusing on. It tells you a lot about the business. 

The way I normally think about the value of a business is in relation to that, then;  if you look at how many assets the company is employing over time (including off-balance sheet liabilities - more on that later), you can combine it with the operating profit figures, make a few adjustments to better reflect…

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