Wednesday, November 16, 2005 12:56:30 PM
Then I always factor in the issue that there are always a percentage of receivables that fall thru the cracks. I like to say 10% for large companies and 20% for smaller companies just to be safe. In some situations where each sale is a huge percentage of the total I dip into 30%. Since we don't know let's use 20%. So that drops us to $2.6M.
Then I look at the bottom few assets (typically goodwill) and I like to subtract those since in the case of bankruptcy the company will only see pennies on the dollar. Thankfully there is no goodwill yet, so we will just take away about $60,000 for now (round up to $100,000). That leaves us with $2.5M.
Lastly I like to factor in the reality that no matter what happens the banks will get their interest payments and the G&A expenses will have to be paid. This is a fudge factor of sorts. We were looking at $560,000 of debt. Without digging further for a rate I assume 10%. The G&A comes to about $140,000 so I rounded up to another mil which leaves us with a pretty solid $1.5M. Dividing that by the full 200 million (which is unlikely but a good safe estimate) comes up with $0.0075. So I can see why we are trading in this region.
BUT, I consider that our downside risk, which in this case is practically nil. The upside case include possibly half the number of outstanding shares as well as the chance to recoupe all receivables. I would not be ashamed to say that the upside is more like $0.02 which would be 4 times my accumulation level.
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