Wednesday, August 26, 2009

China Crescent Enterprises and Enterprise Value Multiples

We shall continue with evaluating China Crescent Technologies (CCTR). Is the stock really as dirt cheap as it appears? Today, I'm going to examine CCTR's enterprise value in relation to revenue, EBITDA, and earnings.

Enterprise-Value-to-Sales (EV/Sales) measures how much you are paying for sales. Generally, the lower the number, the better. The formula for EV/Sales is simple; it's the enterprise value divided by revenue. Based upon the past year, the EV/Sales ratio for CCTR is 0.036. That seems extremely cheap, but we won't know for sure unless we compare it with other companies in this space.

According to Yahoo! Finance, Ingram Micro (IM) and Tech Data Corp (TECD) are competitors. These companies are much, much bigger than China Crescent, so this is not an apples to apples comparison. Still, it might shine some light on a best case scenario for CCTR. Both of their EV/Sales for the trailing twelve months is 0.06.

The Enterprise multiple is calculated by dividing the enterprise value by EBITDA. You can find EBITDA on the income statement. EV/EBITDA tells you roughly how long it would take to pay back the investment. For CCTR, it would be

$1,482,058/$1,330,000=1.11. The investment pays off in a year.

The enterprise multiple for both IM and TECD is around 4.

Finally, let's calculate the return on investment. That's done by dividing earnings by Enterprise value, a slight variation on calculating earnings yield. For CCTR, the return on investment would be 0.44. In other words, if you bought the company outright and retired the debts, 44% of your investment would be in earned income.

TECD's is 0.12 and IM lost money so this metric doesn't really apply.

So what we have here is a stock that is cheap based upon P/E, P/B, P/S, P/CF, P/FCF, EV/S, EV/EBITDA. Where are the flaws? I shall have to keep searching. My next stop is investor relations.


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