Spotless Group Holdings Ltd (ASX: SPO) listed last year and currently has a market capitalisation of $2.4 billion. It also has debt after adjusting for cash of $600 million and so has an enterprise value of $3 billion.
A company is worth the present value of its future cash flows and it is difficult to know what these will be a year from now, let alone over the remainder of a company's life. In most cases, recent history is all we have to go on as a guide to the future.
Between 2010 and 2014, Spotless Group reported total losses of $14.8 million, the first sign that the company is worth nowhere near $3 billion. At the same time, equity rose by more than 60% to $719.2 million representing $273 million of net new funds injected by shareholders.
The following transactions were recorded in relation to the public listing.
- On 22 November 2013 $148.5 million was paid as dividends to existing shareholders prior to listing
- On the same date, $301.5 million of capital was returned to the same shareholders
- On 23 May 2014, $467.2 million was raised from new shareholders when the company was listed
- Restructuring and listing costs were $66.3 million
There are a couple of problems with using the total loss figure for the five-year period between 2010 and 2014 as evidence that the company doesn't generate much cash. Firstly, it includes one-off restructuring and listing costs, and secondly profit and loss figures are not the same as cash flows.
Total operating cash flows over the same period were $248.8 million, but this excludes money spent on plant and equipment which is a necessary ongoing cost associated with running a business.
Total capital expenditure was $361.7 million between 2010 and 2014, but perhaps some of this investment was to grow and not merely maintain the business. Based on last year's depreciation charge, total capital expenditure required for maintenance is approximately $319.5 million for a five-year period.
Even taking the more conservative depreciation figure and adjusting for one-off listing costs, Spotless Group still has negative cash flows of $4.4 million for the five-year period prior to its listing. Whichever way you look at it, it seems that Spotless Group doesn't make very much money.
The most recent half-yearly accounts showed some improvement with the company reporting a profit of $60.2 million. However, operating cash flows after capital costs were lower and six months is a short period on which to base a judgement.
Furthermore, even based on the half-yearly profit figure, the company is trading at a hefty enterprise value to net profit after tax ratio of more than 24x. That is the kind of multiple you would expect to pay for a company with a stellar financial track record, and Spotless Group certainly doesn't fall into that category.
Foolish takeaway
Rather than analysing the historical accounts in this way, investors can always choose to believe the forecast figures given in the glossy prospectus issued on listing. However, it is important to bear in mind that these forecasts were prepared by the same people that received a large chunk of the $66.3 million of restructuring and listing costs given above.
