We are primarily focused on equity research using our proprietor analytical tools. We help investors identify the components that drive value. We work using our ROCGA methodology (Return on Cash Generating Assets). The aim is to neutralise subjectivity from companies reported financial results and approach it from a wealth creation and valuation perspective.
Investor generally rely on accrual accounting measures to make investment decisions. These measures are easy to understand and are readily available. However, there may not be a clear correlation between the required valuation measure. Also, accrual measurements are subjective and vary between companies. ROCGA only looks at a company’s cash generating ability by using the accrual accounting information and converting it into a gross cash number. All cash comes at a cost, i.e. the assets employed to generate that cash. The reported balances sheet numbers go through a series of adjustments and are translated into Total Cash Generating Assets.
Now we have most of the ingredients for a like-for-like comparison and bring all companies on to an equal footing for valuation.
The cash flow and Total Cash Generating Assets are converted into Returns On Cash Generating Assets. This measure better approximates the underlying economics of the company. These calculations are more objective and provides an outlook into the company’s ability to create value over time.
We are thinking of using TOCGA for short. Some of the adjustments to the balance sheet include- inflation adjustment, capitalising operating leases and separating out non-deprecating assets. Strong growth in assets coupled with sustained positive ROCGA (above the cost of capital) gives us value crating companies.