Tandem Group (LSE:TND) – valuation using the return on net tangible assets method

This method of valuation first examines profit after tax as a percentage of net tangible assets over a number of years to get a feel for the efficiency with which managers are able to employ shareholders’ resources. We use the historical information on returns to then estimate the future cash flows, which leads us to the total present value of those future cash flows.

In this analysis I follow Warren Buffett in adding back to profit the amount deducted for amortisation of accounting goodwill. As Buffett says, “One reality is that the amortization charges that have been deducted as costs in the earnings statement each year since acquisition…were not true economic costs”.

And if you want to evaluate managers’ efficiency regarding an investment then the amount of shareholders’ money they used to pay for an acquisition, including all the accounting goodwill already deducted, should be added back to the capital figure.

Buffett commented on this, “In evaluating the wisdom of business acquisitions, amortization charges should be ignored…They should be deducted neither from earnings nor from the cost of the business. This means forever viewing purchased Goodwill at its full cost, before any amortization.”

Return on net tangible asset value, RONTA

£’000s  Year end May		2018		2017		2016		2015
INCOME STATEMENT
Profit after tax		1,622		1,744		777		1,001
Amortisation charge this year for accounting goodwill following acquisitions
Exceptional items distorting profits (positive or negative)		264		393		106		85
Profit for shareholders		1,886		2,137		883		1,086
CURRENT ASSETS AND LIABILITIES
Inventories		4,250		4,001		7,624		6,227
Receivables		4,397		4,539		3,910		5,468
Cash needed for operations (assumed)		1,000		1,000		1,000		878
Other current assets		54		0		117		246
Payables		-4,266		-4,312		-5,571		-5,001
Other current liabilities		-3,685		-3,399		-3,359		-4,593
Working capital for operations		1,750		1,829		3,721		3,225
Surplus cash (assumed)		3,847		2,856		101		0
NON-CURRENT ASSETS AND LIABILITIES
Property, Plant and Equipment		3,480		3,550		3,141		3,267
Goodwill in BS		5,152E		5,152		5,152		5,152
Previously written-off acquired goodwill – add back		4,957E		4,957		4,957		4,957
Other acquired intangible assets in BS
Previously written-off other acquired intangibles – add back
Long-term debt		-1,198		-1,636		-2,077		-2,502
Other non-current liabilities		0		0		0		0
Net non-current assets for operations		12,391		12,023		11,173		10,874
OTHER ITEMS TO CONSIDER
Defined benefit pension deficit		2,827		2,928		4,215		3,608
Internally generated intangible assets capitalised to BS		535E		535		480		460
Investments (in shares, bonds, etc.)		0		0		0		0
Operating lease non-cancellable commitments		1,105E		1,105		1,425		1,493
Preference share capital		0		0		0		0
Minority interests in profit		0		0		0		0
Minority interests in net assets		0		0		0		0

£’000s  Year end May	2014		2013		2012		2011
INCOME STATEMENT
Profit after tax	1,626		354		673		641
Amortisation charge this year for accounting goodwill following acquisitions
Exceptional items distorting profits (positive or negative)	-309		699		0		0
Profit for shareholders	1,317		1,053		673		641
CURRENT ASSETS AND LIABILITIES
Inventories	5,072		3,827		4,783		5,190
Receivables	6,501		5,374		4,829		4,991
Cash needed for operations (assumed)	1,000		1,000		1,000		1,000
Other current assets	142		0		0		0
Payables	-5,457		-3,557		-3,188		-4,271
Short-term debt	-4,869		-4,636		-2,994		-3,512
Other current liabilities	-232		-222		-160		-309
Working capital for operations	2,157		1,786		4,270		3,089
Surplus cash (assumed)	805		1,925		498		1,446
NON-CURRENT ASSETS AND LIABILITIES
Property, Plant and Equipment	3,330		3,128		348		284
Goodwill in BS	3,931		2,236		2,236		2,236
Previously written-off acquired goodwill – add back	0		0		0		0
Other acquired intangible assets in BS	0		0		0		0
Previously written-off other acquired intangibles – add back	0		0		0		0
Long-term debt	-1,500		-1,405		0		0
Other non-current liabilities	-161		0		0		0
Net non-current assets for operations	5,600		3,959		2,584		2,520
OTHER ITEMS TO CONSIDER
Defined benefit pension deficit	4,147		3,461		3,188		4,271
Internally generated intangible assets capitalised to BS	181		0		0		0
Investments (in shares, bonds, etc.)	0		0		0		0
Operating lease non-cancellable commitments	953		1021		n/a		n/a
Preference share capital	0		0		0		0
Minority interests in profit	0		0		0		0
Minority interests in net assets	0		0		0		0

Return on net tangible assets, RONTA = Profit for shareholders ÷ Average net tangible assets over the year (beginning BS and end BS averaged).

Return on net assets, RONA = Profit for shareholders ÷ Average net assets over the year (includes internally generated intangible assets capitalised)

£’000s		2018		2017		2016	2015	2014	2013	2012
Profit		1,886		2,137		883	1,086	1,317	1,053	673
Working cap		1,790		2,775		3,473	2,691	1,972	3,028	3,680
Net non-curr assets		12,182		11,598		11,024	8,237	4,780	3,272	2,552
NTA – averaged		13,972		14,373		14,497

 

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