Traditional securities analysis requires studying the financial records of a company in a process intended to assess the financial value of the company at the end of the stated period. Analysis of the data and the trending of results relative to prior periods becomes the basis for predicting future results for the company. There are two distinct valuations for a company. The liquidation value is the net amount which is believed to be reasonable if the assets of the company were to be sold after the company ceased operations. The market value is that which is believed to be the amount which would be paid by those wishing to participate in the company’s future operations. The market valuation prediction requires a knowledge of both the valuation of other companies and an assessment of the economic prospects for the company and the industry in which it is a participant.

Although the assessment of market valuation of both publicly- traded and privately-owned companies is an art form, usually practiced by those with much experience, it is currently being attempted to become more of a science, using artificial intelligence.

Technical analysis, the study of prior stock price movements of publicly traded companies, as displayed in charts is or can be both competitive and complementary to traditional securities analysis. The formation of sequential stock price movements can be for experienced practitioners predictive of future stock price movements. The successful “reading” of stock charts is also an art form, requiring judgement of more than just the lines on a chart.

In both securities analysis and technical analysis, the past is studied to gain insight regarding the future. In both cases there have been those who have succeeded in being correct in their predictions for various periods. However, it is noted that the predictors of stock price change making the most money have done so by benefitting from investing the money of others. There have been very few investors who have made fortunes just by investing their own capital, and lots of people have lost a great deal of money trying to pick winners.  The making of predictions is a difficult business.

The purchase by investors or a defined segment of a company’s revenues, a revenue royalty, is likely to be less subject to the problems of operating a business or to stock market movements, and more rewarding, than owing shares in the company generating the revenues.

Revenue royalties are not tied to the profitability of the business. They are simply an agreed percentage of a company’s revenues and can be paid whenever the company receives those revenues. There are numerous contractual terms which can be negotiated, meeting the needs of both investors and the companies selling the royalties.

The declaration of high profitability can be problem–causing for companies. Companies demonstrating high profit margins invite both customer pressure for lower pricing and competitor attention. High profit declarations also invite tax collectors and employee wage demands. Highly profitable companies therefore can find it beneficial to manage their businesses so that longer-term ownership benefit is enhanced by other than displaying profitability levels. Those benefitting from high per share profit disclosures are usually those wishing to sell their shares.

Royalties are the better approach for both investors and for companies seeking capital, without the suffering of existing shareholder equity dilution. We are experts in the field of revenue royalties and hold patented approaches to structuring them.

 

Arthur Lipper, Chairman                          arthurlipper@gmail.com
British Far East Holdings Ltd.