I wanted to re-post the following on EVSNF as a reminder to myself to focus on the fundamentals, and not on the stock price action.
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In 2016, the company appears to have generated over $1 million of cash flows in 9 months. How can we determine this number without a statement of cash flows? The answer lies in the balance sheet. Over the past 9 months, cash on the balance sheet has grown by $0.5M Meanwhile, debt on the balance sheet has fallen by $0.5M. There can only be two sources of this funding -- equity financing or cash flow from operations. I think it's fair to rule out the former because diluted shares at the beginning of the year were 93.4M and now sit at 93.7M. (I may be mistaken, but I believe that the exercise of warrants into 7.7M shares actually occurred in calendar 2015 given that the Jan 6, 2016 press release indicates there being $3.2M in cash on the balance sheet as a result of the exercise and the last 20-F shows $3.3M in cash on the balance sheet at the end of 2015.)
Conversely, we know that earnings over the first 9 months have been $1.6M. We also know that EVSNF's depreciation is negligible. The balance sheet shows that non-cash current assets are up $270K (negative cash impact) and non-debt current liabilities are down $130k (negative cash impact). So, that seems to generally sanity check the $1M figure above.
How much capital did EVSNF require to generate the $1M of cash flow from above? Non-cash assets on the balance sheet sit at $3.7M and non-debt current liabilities sit at $1.8M. The difference between these two numbers is my measure of invested capital (since I generally don't mind small companies hoarding cash on their balance sheets). So, it took EVSNF $1.9M of capital to generate $1M of cash flow in 9 months. That's a 53% cash return on invested capital in 9 months (70% annualized).
And how richly valued is this company that seemingly generates a 70% annualized cash return on investment. If my numbers are right, the company's enterprise value is roughly 14x its free cash flows. To my eyes, that 70% cash return on investment doesn't seem to be baked into the valuation.
So, rather than excoriating my business partner, Sam Cohen (he of the $200k annual salary and 17% equity stake) for decisions made in the past year vis a vis iBar, I'd tell him to just keep doing what he's doing. I can very much live with my company treading water with a 70% cash return on investment while waiting for a new product to ramp with customers.
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When I posted that initially, the date was December 2, 2016. The stock price at the time was about $0.29 per share. EVSNF is up about 40% since then. I'm posting this not to take a short-term victory lap, but to chide myself a little bit.
I should have been buying more at those levels instead of nibbling around the margins, which is what I was doing.
EVSNF has extraordinary economics as a small business. If those economics are sustainable over time, the company and its shareholders should be rewarded eventually. Perhaps not in days, weeks, or months, but in years.
Right now, I find the same kind of short-term negativism affecting the price of another one of my holdings -- Virtra Inc. (VTSI). And, once again, I find myself struggling to focus on the long-term, as opposed to fixating on the short-term stock price. There is no guarantee that VTSI will be up in 3 months in the same manner that EVSNF was, but there are some parallels in their business economics. Hopefully, those economics carry the day with regard to shareholder value over the long run.
As always, would love to hear any dissenting opinions on either EVSNF or VTSI.
Cheers.
