Best Format?

[Will Frostmill]

I'll point out that the vast majority of what you will ever spend on a film photography business will be on consumables, which you will buy new. But you can't depreciate those. Expenditures on equipment will be a rounding error. You aren't going to need to go back a year later and buy another camera, so year-to-year comparisons are meaningless. Film holders, sure, you always may need more. Write them off as a consumable. Ditto ground glass backs (they break), bellows (they get holes), shutters go bad and need to be swapped out, and so on. The vast majority of LF equipment can be broken down into parts, most of which are either incredibly durable, new manufacturer (e.g. tripods), or potentially consumable. Get a annual lump sum for consumables, and buy your used film holders, etc out of that. But the math doesn't work on depreciation.

[Greg Y]

Ibuprofen, we seemed to have gotten sidetracked on the subject of depreciation. Tell us a little more about your project. There can't be too many modern businesses with investors lined up to buy a brand new 8x10.... You didn't say much about the photographic environment or subject...as it might better relate to which format might be the best...

[fishbulb]

I know depreciation is based on cost, but I'm talking about post-purchase valuation of capital assets. Buying something new is the most accurate way to do that. Used equipment is too subjective unless I have perfect information about the product's history (i.e. car mileage but even then it's a risk). If it's a year old but has been used twice as much as something three years old, any valuation based on that isn't accurate.

I think you are missing something here. Under US GAAP and IFRS accounting rules, physical assets are valued on the balance sheet at their purchase price, less any accrued depreciation. They aren't re-valued each year ("marked-to-market") unless they are financial instruments (e.g. if the company owns stocks and bonds of other companies) or they are intangible assets [e.g. trademarks and patents (as an aside, intangibles can only be devalued ("tested for impairment") and can't be marked up to a higher value like financial assets)]. So it doesn't matter if it's new or used equipment that you buy. The price you pay for it is the value on the balance sheet (less accumulated depreciation) and you wouldn't normal do any "post-purchase valuation of capital assets". They are "automatically valued" (if you will) post-purchase by the depreciation schedule that you use (usually linear).

Your financial ratios (Return on Assets being one) wouldn't be truly reflective of business health. I need to have a clear depreciation schedule so I know exactly when I can safely consider the asset disposed. If it were just me, I wouldn't care. But, I'll be answering to investors who know what they're talking about.

I'm not so sure about that. Return on Assets is only really useful for measuring the health of a business in terms of seeing how efficient the management team is at deploying their assets, and is typically only used to compare to the company's own history, or other peer companies. As an investor, I would rather look at the company's Return on Invested Capital. ROIC = Net operating profit after tax (NOPAT) divided by total capital invested in the business, e.g. debt + equity investments. If I am only an equity investor, Return on Equity (NOPAT (or more typically Net Income) divided by equity investments is another good choice, especially if there is not a lot of debt in the capital structure. However, for public companies (stock valuation) I prefer ROIC because ROE can end up being skewed upward if the company uses debt financing to buy back publicly traded shares (which is very popular these days due to the low interest rates). That scenario aside, ROE is very useful in that it can be used for DuPont Analysis, which is useful in seeing what is driving ROE changes - leverage, net margin, or asset utilization.

Let's look at an example. With ROA, investors are measuring how well the company is using the assets it owns to generate income. However, different businesses have different amounts of required assets. For example, a shipping company might be very "asset heavy" with offices, warehouses, and trucks, but an software company might be very "asset light" with just the offices. Using ROA, you might think the software company is doing much better than the shipping company because of the lower assets = higher ROA. Let's say you invested $1000 in the stock (equity) of both businesses, and wholly owned both. The software company makes $200 net income on $1000 of assets. The shipping company makes $300 of net income on $2000 of assets, getting the extra $1000 for the assets from a bank loan. The software company's ROA = 200/1000 = 20% vs. 300/2000 = 15% for the shipping company. So the software company was a better investment? Nope. The actual return to the investor is $200/1000 = 20% vs. $300/1000 = 30%. So the shipping company was a better investment, even though it has a lower ROA.

Besides ROE or ROIC, I'd also want to know your EBITDA margin percentage (Earnings before interest, taxes, depreciation, and amortization divided by total sales). This tells me how profitable your core business is, excluding the things that you don't have control over, and it can be monitored for changes over time. It is a key metric for evaluating the success of management in their operating of the company. Finally, free cash flow, or in a pinch, operating cash flow metrics can tell me how well the company is doing at actually generating cash that can be returned to shareholders (investors).

I can guarantee they would raise a stink about valuing a business on used equipment. If I buy used one year but can't find another identical used item the next year, the aforementioned ROA will wildly fluctuate providing prevent an accurate picture for a 3rd party trying to analyze the financial statements. If you have ever worked at a large corporation, rarely do they purchase used assets for this very reason.

I'm not sure that is correct. Large companies actually purchase used assets quite often, especially manufacturing, shipping, and other industries where assets are long-lived and very expensive new (similar to large format cameras, ahem ahem). It just depends on the company and what they are doing. The financial decision to buy used or new mainly comes down to practical questions like estimated lifespan of the equipment, warranties, serviceability, and price. Often the decision of what to buy is based on a return on investment calculation.

For example, if I can buy an industrial drill press for my machine shop for $100,000 new with an estimated lifespan of 10 years and a one year warranty, but I can buy a five year old model for $25,000 with no warranty, the five year old model is half the cost per year, which is likely more than enough to overcome the estimated value of the one year warranty.

[fishbulb]

Some additional thoughts. Several times you mention "valuing a business". I'm assuming that this is because your investors want to know their return on investment, or at least, have some idea of how their investment is doing each year.

As I said above, ROA isn't the best metric for monitoring an investment in a business. It's more for measuring how effective the company is at using the assets they have, versus the past, or versus other similar companies.

But if you are valuing the whole business, the value of the assets on the balance sheet isn't usually even a factor.

If I'm buying a business, all I really care about is the cash flow that the business is generating. This is what goes into my pocket in the form of shareholder dividends (distributions of the businesses income). Assets come and go - as old ones are depleted, new ones are purchased, and the business keeps chugging along.

In practice, this means that most businesses are valued using a discounted cash flow (DCF) methodology. This is done by estimating the future cash flows (free cash flow, which is generally your bottom line net income minus any investments you have to make in the business, any non-cash items etc.). The estimated future cash flows are then "discounted" at a required rate of return. For a small business, this might be a rate of 20%, and for a high-quality blue-chip (say PepsiCo or Johnson & Johnson) it might be more like 10%. Risk is commensurate with return, so higher risk businesses have a higher required rate of return (aka discount rate). The value of the firm is this year's cash flow + next year's cash flow discounted at 20%, plus year two's cash flow discounted for two years at 20% (since it won't be here for two years), and so forth. You can look up the details of DCF calculation anywhere online.

There are other ways to value a business of course, especially if the business doesn't have reliable free cash flow. A multiple of EBITDA, a multiple of sales, a multiple of earnings, a dividend discount model (if the company pays reliable dividends). A third party company might be hired to perform the valuation and base the multiple on similar businesses they have looked at or other assumptions. But assets almost never factor into it UNLESS the business is in bankruptcy and the ONLY value of buying the business is to shut it down and sell off the assets. Otherwise, the free cash flow that an investor receives is what really matters.

That said, it is also important to evaluate the quality of the company's assets - are they tangible and/or saleable (higher quality) or intangible and/or impossible to sell (lower quality). But even then, this isn't a part of assigning a value to the company, it's a qualitative component like evaluating the company's strategy or competitive advantages.

Let's revisit the software company and the shipping company. Let's say I want to sell my shares of those companies after five years. The software company started at $200/yr, and has been growing earnings at a rate of 5% per year. The shipping company has been producing $300/yr, and has been growing at a rate of 2% per year. Since both companies are operating successfully, the value of the assets doesn't matter since I'm not going to sell them. This is the concept known as a "going concern" if you want to read about it.

So, I do a DCF analysis. The cash flows are equally stable, and the businesses are similar in size, so both companies get a discount rate of say 15%. The software company is valued at $2342 and the shipping company is worth $2435, using a very simplified DCF calculator here: http://www.gurufocus.com/fair_value_dcf.php

Now let's imagine that instead, after five years both companies are almost bankrupt. Well, then the value of the assets matters, since the businesses are done and there are no cash flows. Both companies were doing linear depreciation, and I find that the depreciated value of the assets accurately reflects market value. The software company has assets worth $500 so I sell those, and lose half my investment. The shipping company has assets of $1000, but still owes the bank $500 on the loan. Debt holders get first payment ahead of stock (equity) holders, so they take their $500. I get the remaining $500, and lost half my investment.

[Peter Lewin]

Most of what I would post has already been said; my primary thought had to do with the much more readily available 4x5 enlargers, versus a 5x7 enlarger. But I'm curious about the OP's comment in the middle of the thread that he wants to contact print the 5x7s (which eliminates concerns about the enlarger). But at that size print, aren't you better off with a digital camera (heresy, I know)? With a shift lens and photoshop you can pretty much do anything you could with a view camera. Now don't take me wrong, I personally love working with a view camera, but for a business use and such small prints, it doesn't really sound like the tool for the job.

[Maris Rusis]

A friend prompted me to think about why I chose the 8x10 camera and with it the black and white contact photograph as the best format. This is what I wrote:

The 8x10 contact is a canonical form with a deep history in photography.
Grievous error aside all 8x10 contacts are technically equivalent; mine, yours, Ed Weston's, Ansel Adams'.
No upgrade is possible or necessary.
No grain ever. Infinite looking sharpness and gradation are available with no particular effort.
Cheap materials. From go to whoa for less than $5 if one is reasonably frugal.
Enough possibilities for a lifetime of work.
The 8x10 size is big enough to offer an impression of presence but not so big that carrying the camera will eventually break you and curtail your productivity.
Thousands of 8x10s can be stored, they can be mailed, displayed conveniently, scanned on a cheap flat-bed A4, and they won't become a archiving nightmare like a huge pile of big pictures.
No elaborate darkroom is required, no enlarger; just a safelighted work space, a lightbulb, contact frame or sheet of glass, and a few trays.
The 8x10 is still small enough so I can do everything from film exposure to mounting, matting, and framing. No need to buy expensive services from back-room people.
No competition within its own aesthetic. Why would I strive against 50 million hard working talented digital shooters climbing over each other's backs trying to get noticed?
Anything well photographed on 8x10 seems to acquire a nobility that invites attention.
The 8x10 photographer is pretty well guaranteed to be taken more seriously than someone plinking away with a cell-phone.
Ultimate conceptual integrity. The 8x10, like all contact formats, is seen, exposed, processed, finished, mounted, and displayed without changing its original size or its original vision.
There is no cropping. The photographer takes full responsibility for the content right to the edges and corners. The viewer knows they are not short-changed.
No digital technology is used or required. No files need reformating into new media. Everything is eye readable. The medium guarantees it.

What do you think? Did I miss something?

[John Kasaian]

A friend prompted me to think about why I chose the 8x10 camera and with it the black and white contact photograph as the best format. This is what I wrote:

The 8x10 contact is a canonical form with a deep history in photography.
Grievous error aside all 8x10 contacts are technically equivalent; mine, yours, Ed Weston's, Ansel Adams'.
No upgrade is possible or necessary.
No grain ever. Infinite looking sharpness and gradation are available with no particular effort.
Cheap materials. From go to whoa for less than $5 if one is reasonably frugal.
Enough possibilities for a lifetime of work.
The 8x10 size is big enough to offer an impression of presence but not so big that carrying the camera will eventually break you and curtail your productivity.
Thousands of 8x10s can be stored, they can be mailed, displayed conveniently, scanned on a cheap flat-bed A4, and they won't become a archiving nightmare like a huge pile of big pictures.
No elaborate darkroom is required, no enlarger; just a safelighted work space, a lightbulb, contact frame or sheet of glass, and a few trays.
The 8x10 is still small enough so I can do everything from film exposure to mounting, matting, and framing. No need to buy expensive services from back-room people.
No competition within its own aesthetic. Why would I strive against 50 million hard working talented digital shooters climbing over each other's backs trying to get noticed?
Anything well photographed on 8x10 seems to acquire a nobility that invites attention.
The 8x10 photographer is pretty well guaranteed to be taken more seriously than someone plinking away with a cell-phone.
Ultimate conceptual integrity. The 8x10, like all contact formats, is seen, exposed, processed, finished, mounted, and displayed without changing its original size or its original vision.
There is no cropping. The photographer takes full responsibility for the content right to the edges and corners. The viewer knows they are not short-changed.
No digital technology is used or required. No files need reformating into new media. Everything is eye readable. The medium guarantees it.

What do you think? Did I miss something?

Dagnabbit! Now you're making me want to go sell my 4x5 kit again

[Kirk Gittings]

Dagnabbit! Now you're making me want to go sell my 4x5 kit again

not

[jnantz]

5/7 is the best format for a lot of things ...
used holders for less than 20$ each ...

[Heespharm]

A friend prompted me to think about why I chose the 8x10 camera and with it the black and white contact photograph as the best format. This is what I wrote:

The 8x10 contact is a canonical form with a deep history in photography.
Grievous error aside all 8x10 contacts are technically equivalent; mine, yours, Ed Weston's, Ansel Adams'.
No upgrade is possible or necessary.
No grain ever. Infinite looking sharpness and gradation are available with no particular effort.
Cheap materials. From go to whoa for less than $5 if one is reasonably frugal.
Enough possibilities for a lifetime of work.
The 8x10 size is big enough to offer an impression of presence but not so big that carrying the camera will eventually break you and curtail your productivity.
Thousands of 8x10s can be stored, they can be mailed, displayed conveniently, scanned on a cheap flat-bed A4, and they won't become a archiving nightmare like a huge pile of big pictures.
No elaborate darkroom is required, no enlarger; just a safelighted work space, a lightbulb, contact frame or sheet of glass, and a few trays.
The 8x10 is still small enough so I can do everything from film exposure to mounting, matting, and framing. No need to buy expensive services from back-room people.
No competition within its own aesthetic. Why would I strive against 50 million hard working talented digital shooters climbing over each other's backs trying to get noticed?
Anything well photographed on 8x10 seems to acquire a nobility that invites attention.
The 8x10 photographer is pretty well guaranteed to be taken more seriously than someone plinking away with a cell-phone.
Ultimate conceptual integrity. The 8x10, like all contact formats, is seen, exposed, processed, finished, mounted, and displayed without changing its original size or its original vision.
There is no cropping. The photographer takes full responsibility for the content right to the edges and corners. The viewer knows they are not short-changed.
No digital technology is used or required. No files need reformating into new media. Everything is eye readable. The medium guarantees it.

What do you think? Did I miss something?

All the same things for 4x5... If your making post cards hahaha... Makes me wanna do 8x10 again... I used to have FOUR 8x10 cameras... Now nothing..