German Software Stocks - Financial Analysis Intro

As stated previously I will analyse German Software companies. Most financial information is meaningless to me for the purpose of arriving at an attractive price. I can of course compile benchmarks and understand why current coverage, cash cycle theoretically matter but I don’t feel comfortable with it.

What I will do instead is put a value on the whole business then divide that by the number of shares. That will give me the price that I’d be willing to pay for more shares.

But, before I do this I want to share my approach so that I do the same thing for all companies and can improve. This is also written fast and based on common sense. I write we because I own a share of each company.

I will keep this part purely financial, some of the questions serve as preparation for qualitative research or asking the management.

Questions I want answers to:

  1. Does selling the current products make more cash than it costs to make them?
  2. Are there more customers for the products with similar acquisition costs in the future?
  3. Have less people bought our products in the lastly?
  4. Are we making a lot of investments?
  5. Have we made a lot of investments in the past?
  6. How good have the past investments been?

Definition of “Investment” and “Investment” in the context of Software businesses

An “investment” is something that you do today to generate cash in the future. If it does not generate cash it was a bad investment. But, if it does generate cash it is not automatically a good investment. Because it could also not be an investment at all.

Example: If I am in the business of selling balloons on the Oktoberfest, than the thing to put gas into the balloon is not an investment. Yes, it generates cash. Yes, it is re-used when there is gas filled it. But if I buy a new one, I cannot tell my investors that I have “invested” in something. The new gas thing will not generate more revenue at the next Octoberfest, it will just allow me to do any revenue.

Normally, I would expect to find the “investments” in the assets on the balance sheet. Now, in case of software, most likely there will not be an asset on the balance sheet but I expect it to be somewhere on the incoming statement - hidden as labour costs.

Enough theory, let’s start

I feel there has been too much theory from me. I will start and later come back to this article. The questions above still stand.