What Is Intrinsic Value? – Little Or No Debt

My definition of intrinsic value boils down to “a wonderful company fairly valued”. By judging 14 value elements I’ll determine if a company deserves this description.

14 Elements in My Definition of Intrinsic Value
(1) Strong Cash Flow
(2) Strong Earnings Growth
(3) Dividend Consistency
(4) Consistent Dividend Increases
(5) Profitability
(6) The Formula: E(2R+8.5)*Y/4 = Intrinsic Value per share
(7) Good returns on equity
(8) Little or no debt
(9) A business model I understand
(10) A durable competitive advantage
(11) Measure Risk
(12) Providing reliable long term dividend income streams
(13) Increasing annual dividends faster than the inflation rate
(14) Expect to generate at least a 9% total return compounded annually

(8) Little or no debt
Wonderful companies have little debt. This ensures that in difficult times they can service their debt without endangering their survival. I’ll measure my eighth value element, “Little or no debt”, by picking up a company’s “Current Ratio” and its “Total Debt / Equity” ratio from The Motley Fool - Stats Tab after logging into the site.

“Current Ratio” is defined as current assets divided by current liabilities from the company’s balance sheet. I prefer to use the inverse of the current ratio (current liabilities divided by current assets. So, when I pick up the “Current Ratio” from The Motley Fool - Stats Tab I’ll divide it into “1.0” to get the inverse.

On April 14th, 2010 the “Current Ratio” for Abbott Laboratories (ABT) was “1.80”. The inverse then is 1/1.80 = 0.56. In my analysis I’ll penalize companies for relatively higher Inverse Current Ratios.

I’ll use the “Total Debt / Equity” ratio exactly as shown on The Motley Fool - Stats Tab. And, I’ll also penalize companies for relatively higher “Total Debt / Equity” ratios.

Eight value elements are defined leaving six more to go.

Link to Other Topics in the Get Rich Slowly Report: What Is Intrinsic Value?