No. of Recommendations: 1
Hi merchasd,

These types of stocks are typically valued for operations that will happen kind of far out in the future, so I use current financial statements to mainly find two things. The cash burn rate and a base level to project future etimates of income.

The cash burn rate is for companies that don't have much earnings and are using up a lot of cash now for profits in the future. The goal of looking at this is to estimate if they will have enough cash to get them to that future. I typically look at least the last 8 quarters cash flow statements. This will give you a pretty good idea where the cash is coming from and going and about how fast they are using it.

If the company is cash positive or the burn rate is insignificant, then the income statement can be used as a base to try to estimate future earnings or losses. The actual sales and costs aren't as important as the %'s like gross margin, net margin, expense ratio's to sales, etc. Because it is assumed that the sales in the future will be much higher than current, a lot of variations usually need to be made when these %'s are applied to the future expected sales, its a lot more art than science and the more you know about the companies business and others in the same industry the better.

By feeling really comfortable knowing where the cash is coming from and going and feeling pretty comfortable that you have a reasonable estimate of the companies possible future earnings, I think you're a long way to getting that tough valuation for these kind of stocks.

ZB
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