THE NATIONS' CAPITAL; Six numbers for evaluating deals


There are five basic categories of investments: cash, bonds (lending money
in exchange for interest and repayment of principal), stocks (business
ownership), real estate and natural resources.

Let's focus on business, real estate and natural resource ownership.

Historically, tribal members operated cooperatively in pursuit of
agriculture, fishing, hunting and tool manufacturing. This culture of
sharing is still prevalent today, except that tribes distribute money

A few tribes in California distribute as much as $40,000 a month to each
member, while other tribes elsewhere had nothing to share. Why?

The usual answer is "the casino" or "the oil and gas enterprise." True; but
there's more to it, because not all tribes that own casinos or businesses
make money.

Tribal ventures are not riskfree. Unlike holding cash or bonds (lending out
money), there is no assurance of repayment of interest or principal. There
is no liquidity in a tribal casino. A tribe can't put up its oil and gas
production business for sale and convert the hard assets into cash.

This leaves leaders of tribal ventures with nothing but a goal to succeed.
It's in the nature of business to risk a tribe's capital and exploit unique
opportunities to generate a return. That's the only way to produce a
financial return for tribes.

When one thinks of capital, money usually comes to mind. Tribes have other
capital, such as gaming, mineral, forestry, agriculture and livestock, to
name a few. One doesn't usually think of it this way, but time and human
talent (such as a highly productive operating team) are critical elements
of success. After all, a business is as good as the people who run it.

A successful venture always starts with a visionary leader, a person who
can bring together specialists to put a deal together in a timely fashion.
It's the same for tribes that are struggling to restore their federal
recognition, tribes that have acquired land but need to put land into
trust, or tribes that are developing and growing their ventures.

The same principles apply when tribes look for investment opportunities,
whether in the form of stocks in a publicly traded company, private deals,
or real estate or natural resource venture.

Analysts take the 110 items from the standard financial reports (profit and
loss, balance sheet and cash flow statements) and created over 50 ratios to
measure the relative strength of a business. Even though these names sound
fancy, they do make common sense.

Tribal leaders can use a few of these numbers to check out prospective
business partners, or measure how well their tribe is doing in relation to
competitors and the overall industry.

* Time value of money. A prudent person would put money into safe -
principal guaranteed - investments and get some interest in return. In
money managers' circles, the typical rate is a 5 percent return each year.
This is the benchmark return that should be demanded by all tribes.

* Enterprise value. This is an economic measure of total funds being used
to finance an enterprise. It is especially appropriate for casino startups
because of the heavy borrowing involved early on.

As an example, for a luxury hotel-casino complex with 900 slot machines and
600 rooms, the enterprise value would be) the sum of $10 million in
preconstruction legal and good faith deposits to the tribe and $400 million
in actual construction costs.

* Free cash flow. This defines the amount of money that a business has
after paying out operating costs, interest payments on bank loans and
bonds, salaries, research and development, and other fixed costs.

For the casino enterprise illustrated above, the business generates cash
from slot machines, table games, concert ticket sales and restaurant food
sales. Management has to pay winnings, interest on construction and slot
machine loans, staff wages, utilities, food and refreshments and other
operating costs. Free cash flow is the net money between what's taken in
and what's paid out.

* Return on equity. This is a ratio that measures how well management is
using the net financial assets of the business. (Formally, it is profits
excluding non-recurring gains or losses/equity.)

By tracking this number year after year, managers can see a historical
pattern of return. When tribal leaders make additional investments, either
back into the same business or into a new business, this is the rate they
should expect to get.

* Growth. It's the difference of profits from one year to the next. An
upward trend with positive numbers denotes consistent growth.

* Enterprise value/free cash flow. While the return on equity and growth
rates are straightforward, one can create a meaningful ratio of enterprise
value over free cash flow to double-check management's savvy in generating
profits. The smaller that ratio, the better managers are capable of making

As they say, numbers don't lie. Even though past performance is no
guarantee of future return, tribal leaders should use these numbers to
measure performance. They can be used as a report card, whether it's a
tribe's own ventures or to check out business partners or evaluate new