Being supportive for a possible deal that would give DECN 20 Mio Cash into the Treasury, I thought to entertain the idea, what this would mean for the future.
Let,s calculate a possible Cash Turnover Formula.
Assume DECN in 2016 would generate sales for 30 Mio (or 1 % of the Lifescan market share)
Assume DECN would have 20 Mio Cash in the Bank.
Assume those 30 Mio Revenue would yield a net profit of $ 3 Mio (10%) it would then mean, that their cash is yielding: 15 % (3 Mio of 20 Mio)
So then at the end of 2016, DECN would have $ 23 Mio in the Bank.
So the cash turnover ratio would be 30 Mio divided by $ 23 Mio = 1.3. (This would be much too low of course, but it would as well mean, that DECN would have to much cash at hand) as this would mean, that every $ 1.—of their cash generated only $ 1.3 worth of revenue.
CONCLUSION: If with my extremely low forecast of a Cash Turnover Ratio of 1.3 DECN profits yields 15 % of their cash in the bank, what would it then yield if DECN would reach 100 Mio revenues in 2017 (3,3% of the market-share Lifescan has)
The CTR would be: With 10 % net profit margin = $ 10 Mio.
Ratio: 100 Mio divided by 10 Mio (2018) plus 23 Mio (Reserves plus 2017) = 3.3 % and the yield to cash would be (10 Mio of 23 Mio) = 43 % Yield. (Every Private Equitiy Company would get tears in their eyes with such a return on Cash)
What would this do to the stock? Well that would be rather obvious – up – up – up.
Let’s assume the company has 50 Mio O/S by then.
The capitalisation based on a P/E Formula of 15 (expected growth rate) would be 150 Mio (based on 100 Mio revenues)(excl.Cash)
The company would have Cash at hand of $ 33 Mio which would be too much based on the low CTV. So the company would do what AAPL is doing: Use the 50 % of the Cash to buy back shares or roughly 16.5 Mio. If this trend becomes a pattern, so the stock will get 2 momentums:
- Expected growth rate of 15
- Expected buy backs every year of shares with 50 % of the revenues.
The stock would outperform year over year and become a Darling of the Small-Cap or Medium Cap Industry.
And this all: Because DECN was in a position to start with plenty of Cash and no debt. From this point of view then, I would fully support the management in their idea: To get this deal done. Close the books and go ahead with Genstrip and another product and go for revenues of 300 Mio which could easily be financed by the ever growing Cash-position even after deducting 50 % of the net profit for buybacks. Well, if this is nothing to go for?
