BUYING BUSINESS

SHOPPING FOR QUALITY, VALUE AND GROWTH.

BUYING QUALITY (WHAT MAKE A GOOD COMPANY)

1. Get records and information about a company’s management you can ask
information of the
Chairman of the board
The secretary of the board and other members on the board of director
Management team and see whether they are capable of driving the company
into the future C.E.O, C.F.O, HR, HEAD OPERATIONS

2. look into the product of the company

What do the company trades to make revenue?
How buys the company trading?
When does the product often get re-bought?
How is it packed?
What is the quality of the product sold, durability?
How near or far are they brought to the end user?
Who are the product distributors and how it is distributed
How well the product is marketed, how many people know the product?

3. Research and development.

How often or new products from the company put on market
How much do they invest in R and D?
Good companies should have a good and marketable product.

BUYING VALUE (BUY ON DISCOUNT)

1. Price per Earning (P/E) ratio this gives the investor how much is the price of
a share of a company compared to its earnings this is great if it is less or equal
to 12.

Price of Stock
P/E = ----------------------------------- = < 12
Annual Earnings per Share

2. Price to Earning to Growth (PEG) ratio this gives the investor chance to
know how the company has been performing the previous years see its
prediction for the next years and see whether the management can keep the
company growing to maintain an appreciation in its price. If it is less or equal
to 1 it is promising. A ratio used to determine a stock's value while taking into
account earnings growth. The calculation is as follows

P/E
PEG = -------------------------=<1
E/S Growth rate

Isaac Setabi’s analysis 1

 E/S growth rate: (Earnings Est. for upcoming year -Current Earnings) x 100
Current Earnings
PEG ratio results greater than one suggest one of the following:

• Market expectation of growth is higher than consensus estimates.

• Stock is currently overvalued due to heightened demand for shares.
PEG ratio results of less than one suggest one of the following:

• Markets are underestimating growth and the stock is undervalued.

• Analysts' consensus estimates are currently set too low.

3. Enterprise Multiplier (EM) or Enterprise Value (EV) per Earning Before

Interests, Taxes, Depreciation and Amortisation (EBITDA). This is better than
price per earning ratio (P/E). is a valuation multiple that is often used in
parallel with, or as an alternative to, the P/E ratio. Typically, this ratio is
applied when valuing cash-based businesses.

EV refers to all enterprise economy. The take over price what some one can
pay to acquire the company.

EV = Mkt Cap.(No. of Shares X Share Pr.) + Total Debt (Liab.) – Total Cash.

EBITDA = Revenue – (Expenses – (Tax + Interests + Depreciation)).

EBITDA = Net Profit + (Tax + Interests + Depreciation).

EV
EM = ----------------
EBITDA

4. Price to Book (P/B) ratio is the valuation multiple which compares the price
of stock to the value of equity in the balance sheet thus asset less liabilities. A
ratio used to compare a stock's market value to its book value. It is calculated
by dividing the current closing price of the stock by the latest quarter's book
value per share. Also known as the "price-equity ratio".

Price of Shares
P/B = ---------------------- =< 2
Book Value

Book Value = Total Assets – (Intangible Assets + Total Liabilities).

Book Value is what share holders would get in case company is liquidated
intangibles includes patents, goodwill.

Good to look at Enterprise Multiplier, P/E, and then PEG and P/B the less results
imply that the company is under valued.

The riskier you think the company is the greater the discount should be.

Isaac Setabi’s analysis 2

BUYING SAFETY.

1. Big Discounts Margin of Safety this is when you buy your stock at a price
below your calculated buying value. Should be greater than 25% because even
when the price goes down will not reach that level if it does reach the level of
25% you will not be affected much then you will be the first one to gain
during recovery. A principle of investing in which an investor only purchases
securities when the market price is significantly below its intrinsic value. In
other words, when market price is significantly below your estimation of the
intrinsic value, the difference is the margin of safety. This difference allows
an investment to be made with minimal downside risk.

Margin of safety doesn't guarantee a successful investment, but it does provide

room for error in an analyst's judgment. Determining a company's "true" worth
(its intrinsic value) is highly subjective. Each investor has a different way of
calculating intrinsic value which may or may not be correct. Plus, it's
notoriously difficult to predict a company's earnings. Margin of safety
provides a cushion against errors in calculation.

2. Fat Margins tell you how much profit a company makes from its revenues.
Gross margins factor in very basic costs. Operational margins factor in a host
of additional costs to “operate” the business. I look for operational margins of
at least 15%. I go gaga over operational margins of 25% (and gross margins of
50%). operating margin, operating income margin, operating profit
margin or return on sales (ROS) is the ratio of operating income (operating
profit) divided by net sales, usually presented in percent.

Operating Income
Operating Margin = ---------------------------=< 25
Revenue

Earnings Before Interest and Taxes (EBIT) is a measure of a firm's

profitability that excludes interest and income tax expenses.

EBIT = Operating Revenue – Operating Exp (OPEX) + Non-operating Income

Operating Income = Operating Revenue – Operating Expenses

3. Economic moat a slight competitive advantage that one company enjoys over
competing firms operating in the same or similar type of industry. A narrow
moat is still an advantage for a company, but it is one that only provides a
limited amount of economic benefit and will typically last for only a relatively
short period of time before competition marginalizes its importance. The
phrase "economic moat" was coined by legendary investor Warren Buffett.
This phrase has since been refined to differentiate between "wide moats" and
"narrow moats". Wide economic moats offer substantial economic benefits
and are expected to endure for a prolonged period of time, while narrow moats
offer more modest economic benefits and typically last for a shorter period of
time.

Isaac Setabi’s analysis 3

 Absolute Advantage The ability of a company to produce a good or service at
a lower cost per unit than the cost at which any other entity produces that good
or service. Entities with absolute advantages can produce something using a
smaller number of inputs than another party producing the same product. As
such, absolute advantage can reduce costs and boost profits
Comparative Advantage A situation in which company can produce a good
at a lower opportunity cost than a competitor. Let's break this down into a
simple example. Suppose that two firms both produce two main products: ice
cream and bicycles. The first firm, the Danish Ice Cream and Bicycle Co., is
located in Denmark, where dairy milk is abundant; the second firm, the Gobi
Ice Cream and Bicycle Co., is smack in the middle of the Gobi Desert.

The Gobi Ice Cream and Bicycle Co. must spend a lot of money to make ice
cream, whereas the Danish Ice Cream and Bicycle Co. spends way less to
produce the same amount. The two firms are dead even in their production
costs for bicycles.

Because the Danish Ice Cream and Bicycle Co. has a comparative advantage
with ice cream production, it should probably consider turning exclusively to
ice cream. Along the same vein, the Gobi Ice Cream and Bicycle Co. should
probably give up the ice cream and focus on the product in which it is the least
disadvantaged (bicycles).

4. Debts this are the liabilities on the balance sheet it is not the amount which
matters but the conditions on the loan for instance specifying how much cash
flow should be generated to meet the debt and interest obligation. Debt to
Equity has to be less than 50 the same to date Repayment to cash flow

Debts (Liabilities)
Debt to Equity (D/E) = -------------------------------=< 50
Equity

Debt-to-income ratio (DTI) is the percentage of a consumer's Annual income

that goes toward paying debts. (Speaking precisely, DTIs often cover more
than just debts; they can include certain taxes, fees, and insurance premiums as
well. Nevertheless, the term is a set phrase that serves as convenient, well-
understood shorthand.) There are two main kinds of DTI, as discussed below.

Debts (Liabilities)
Debt to Income (DTI) = -------------------------------=< 50
Income
If the debt to equity or DTI ore higher this means that there will be fewer
returns on Investments.

5. Cash Flow After Taxes - CFAT

A measure of financial performance that looks at the company's ability to
generate cash flow through its operations. It is calculated by adding back non-
cash accounts such as amortization, depreciation, restructuring costs and
impairments to net income.

Isaac Setabi’s analysis 4

 CFAT = Net Income + Depreciation + Amortization + Other Charges

Also known as "After-Tax Cash Flow". Is important for investors because it

gauges a corporation's ability to pay dividends. The higher the CFAT, the
better positioned a business is to make distributions. CFAT also measures the
company's financial health and performance over time and in comparison to
competitors.

BUYING GROWTH
In the music industry, they’re called one-hit wonders. I’m talking about groups that
had one big hit, and that’s it. Needless to say, they don’t make a whole lot of money
for themselves, their managers, or their record companies.
Some companies are like that. They have a good year or two, and then it’s downhill
from there. Avoid these companies like the plague. How? By not even taking a
passing glance at these 1-year or 2-year wonders. You are only interested in the 10-
year (or more) wonders. You like a 10- year minimum track record of growth. Not
because it proves a company can continue to grow. The only thing it proves is that the
company grew during the past 10-year period. But if the company had the same
management then as it has now, they should know how to squeeze growth out of the
company going into the future. Whether or not they can do it remains a big question.
But it is a question that a track record of length helps answer. Ten years of leaving its
footprints in a market can reveal a great deal about a company.

Are you buying quality, safety, and growth at a discount? If yes, with no doubt go for
it. Buy that stock.

Isaac Setabi’s analysis 5