The Float Of The Companies I Own
Originally I was planning on evaluating the float of every company I have written an article on but decided to just focus on the companies whose stock I currently own. Below I am going to give you an example of the full analysis on one company and then just do an overview and chart of the rest of the companies as the calculations are all the same.
Brazil Fast Food Company (BOBS)
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All numbers for BOBS are in $R million unless otherwise noted.
- Financial Assets: Cash and cash equivalents of 28.4+prepaid expenses of 1.2+advance to suppliers+deferred tax assets net of 6.8=38.5
- Operating Assets: All other assets such as goodwill, IA, AR, inventories, etc of 89.3.
- Total Assets=127.8.
Liabilities
- Equity of 38.3
- Debt of 21
- Float-Accounts payable & accrued expenses of 9.7+payroll and related accounts 6.7+taxes 4.6+deferred income tax 0.2+current portion of deferred income 2.5+current portion of contingencies and reassessed taxes 2.1+other current liabilities 0.8+deferred income 2.4+long term contingencies and reassessed taxes 17.9+other liabilities 1.2=float of 48.1
Total liabilities are 69.4
Float/operating assets=53.86%. BOBS float is supporting 53.86% of operating assets meaning that BOBS float is not completely free. The float being completely free would mean that the company’s operations are being operated generally by completely free money if the ratio was over 100% and the float is costless. A situation where float is costless is when an insurance company is earning an underwriting profit. BOBS still has a pretty good portion of its OA operated by float, as you will see in the chart below, which is always a good thing.
Pretax profits/total assets=ROA
- 17.4/127.8=13.62%
Pretax profits/ (total assets-float) =levered ROA
17.4/79.7=21.83%
| BOBS | MAIN | CMT | STRT | VIVHY | DOLE | |
| Float/Operating Assets | 53.86% | 90% | 27.27% Want to learn how to find, evaluate, value, and buy great stocks fast? Ones that have helped me produce average annual investment returns of 23.5% per year on average in the first 9 years of my career? Click here to learn more about our Value Investing Masterclass. | 60.53% | 37.68% | 27.69% |
| Unlevered ROA | 13.62% | 9.59% | 14.23% | 10.65% | 6.43% | 1.29% |
| Levered ROA | 21.83% | 9.73% | 19.25% | 20.59% | 9.67% | 1.79% |
As you can see from the chart, BOBS, MAIN, and STRT all have float supporting more than 50% of each companies operating assets and BOBS, CMT, and STRT’s levered ROA make the companies look even better than I already thought they were.
VIVHY and DOLE, my two spin off companies that I do not plan to hold for as long as the other companies above, have ratios that are generally quite a bit worse than the other four. Looks like I have been doing a decent job of spotting float in my long term companies before I even knew what it was.
To tie this whole theme up of the past several weeks I am capping it off by analyzing and evaluating an insurance company, the ultimate providers of float and a big reason why Buffett was able to compound his returns at such a fantastic rate over the past four decades. I started research last night on an insurance company whose market cap is under $75 million and will have the write up written as soon as possible. It will take me longer than usual to get this article ready because this is the first time where I have truly tried to evaluate an insurance company and need to learn as I am going; the specific terms and best ways to evaluate this type of company.
In the mean time I will probably post some links but from now on I will not be posting updates on what I am doing anymore. I am constantly reading, learning, and trying to find companies to research and evaluate so if I don’t post for a while, from here on out that just means I haven’t found a company I think deserves a full write up.
Jason,
I really like your posts. 1 question and 1 suggestion. Could you do a quick post that guides me to where you’re learning about float? I know fundoo professor had a fantastic presentation, but is there anywhere else to learn about floats? Also, i think you should add a “contact me” page to your blog. That would allow people to send you things like investment ideas or thoughts that aren’t necessarily directly related to your posts, and it sometimes stimulates a lot of great discussion.
Awesome blog!
Shamapant
Search Float in the search bar and it should bring up everything I have tagged involving float, which has been quite a lot lately.
Due to higher activity lately on the blog, and your recommendation, I will be adding a contact me page so people will know all the various ways they can get a hold of me.
There is a place on the blog for readers to share investment ideas and talk about other topics investing related. The page is The Reader’s Investment Ideas And Analysis Page.
Thanks for you comments and kind words Shamapant.
Did you intend to use the expression of a “float being free” in the same way as Bakshi does in his presentation about floats and moats? I thought he considers a float free if it is costless (not if it covers all operating assets – e.g. slide 23 in his presentation) – Also, how do e.g. Bob’s contingencies qualify as float? are they long-enduring, costless, revolving? Thx!
Yes, and I should have included the words generally and costless in my description of the float of companies sorry about that and will edit it to reflect that.
My understanding of float was that any liability should be considered as float if it is not equity and if it is not interest bearing. I also thought that you only looked at the long enduring and costless part to see how sustainable float was and if it was to be counted on for the long term.
Just because float is not completely costless does not mean that it is still not a better option than either equity or debt as even if the float does have a cost it is still more likely going to be a better, cheaper, and more shareholder friendly option of financing than either of the other two options.
I am still learning about this aspect and will probably go over the slides and the postings on his blog about float again so if I messed anything up let me know. But what I outlined above is my general understanding of how to evaluate the float of a company.
Thanks again Fabian.
Maybe we could approach the float question from a more operational perspective. The common theme in the articles that you linked to earlier, seems to be that there is a pre-payment taken from customers (not suppliers, employees, or the tax collector) for a longer period of time which allows the company to use those funds for investment without paying any interest. For example the premiums of insurance clients, payments from the bluestamp collectors and prepayments for future jet usage at NetJets. In the case of BOBS, I don’t see any equivalent movement of funds from the customer to the company. People just pay their burger and receive it immediately.
@Jake
Thanks for your comments.
I agree with you that BOBS’ float is not equivalent to the other companies you mentioned as their float was definitely a lot better than BOBS, but I wouldn’t totally discount its float entirely either.
As an example BOBS receives advance payments from its trade partner agreements. This year the income BOBS received from those partners was only from business operations as it had already received the advance “bonus” I think in 2010 if I remember right from the description of it, so BOBS should receive another “bonus” this year if the agreements remain in place. At least that was my understanding of the situation.
Along with the other things I calculated above I think that about 54% of its operations are supported by float. I do not think it is in the same league compared to insurance companies who have free float after earning an underwriting profit, or other companies like Blue Chip Stamps who almost certainly had costless float, but I do think that it has been a good thing for BOBS and shareholders as is partly illustrated from the levered ROA calculation after excluding the float.
Let me know what you think about this or if I have missed anything.
Also, most companies get float from employees by receiving their services and not having to pay salary till a certain amount of time after the service has been rendered….isn’t that why lots of float is in accrued expenses or accounts payable?