The Risk of Financial Modeling

In my previous post, I spoke about Japfa Ltd and my belief that the company would not be able to keep up with industry growth rate. In addition, I believe that the industry might undergo fragmentation which would compress margins.

In this post, I would like to retract some of my thoughts on Japfa Ltd. For one, I realized that I have made a mistake in my model which blew maintenance CAPEX out. I erroneously used inflation rather than D&A with inflation as a proxy. When adjusted, the risk of Japfa drops tremendously. 

For example, (EBITDA-Maintenance CAPEX)/Interest Expenses is now at a healthy 1.5x, and  ROIC is in the low-mid teens range. This is critical as this means that the company has the ability to generate value by adding debt to the business, and they are more than able to do that with a 1.5x (EBITDA-Maintenance CAPEX)/ Interest Expenses. Concurrently, even with expansionary CAPEX (Includes growth required to maintain market share), the ratio remains above 1.0x. 

This has tremendous implications. For one, it means that the company is no longer destroying value in growth. For another, it means that industry fragmentation (while still a risk) is less likely to occur. It is even possible for Japfa to do expansionary+ (growing market share) CAPEX. 

A complete 180 degree turn from a single mistake. This is the risk of using a financial model, a single mistake could wreck your model. The morale of the story: Double check your work (especially if you are posting it online for the world to see).