Dart seemed so cheap last time I tried to measure the market’s valuation, it broke my calculator. Time to think again.

On the balance sheet, Dart has ''535m in tangible assets, which it used in the year to March 2012 to earn an after tax operating profit of ''22m, a return of 4%. An investor would almost certainly require more, which implies paying less for the company than the value of its tangible assets, 60% less for a 10% return, or about ''214m.

Since Dart’s market capitalisation is only ''110m, it looks as though Mr Market is offering Mr Investor the company at half price. If we deduct the ''66m in cash it held at the year end (net of ''9m in borrowings), the market is valuing the company at just ''44m, 21% of my first estimate of its value.

The stockmarket may be inefficient, but it only throws up bargains like that in the most extreme circumstances. Either investors are morbidly doleful, the calculation is wrong, or Dart is in trouble and extremely unlikely to repeat this year’s performance in future.

Dart’s doing well enough, investors are sanguine, so the calculation deserves scrutiny.

In fact Dart had an additional ''77m in money market deposits, ''152m in cash or near cash. If it isn’t required by the business,  a buyer could pay the market price and relieve the company of its cash for an instant profit. The transaction would more than pay for itself.

It can’t happen, not if Dart wants to stay in business.

Dart’s put up ''100m, two thirds of the cash, as collateral against jet fuel and foreign currency hedges, financial contracts designed to reduce the impact of volatile prices. Those contracts are probably essential because profit margins are thin and profit could easily turn into a hefty loss should costs rise.

Also, the company funds its operations from advanced ticket and packaged holiday payments, but it can’t always rely on new inflows of cash to finance salaries and leases because the airline industry is cyclical and there may simply be fewer passengers in future. Dart needs a cash reserve (in addition to largely undrawn bank facilities) to ensure it can stay in business should demand fall.

In the absence of a better guess it seems prudent to assume Dart requires all the cash and so, having decided the company is unlikely to return any of it to shareholders, Dart remains about 50% undervalued. 

But there’s another possible source of inaccuracy in the calculation, this time in the debt component. Like all airlines, Dart leases planes, vehicles, property and machinery and these operating leases, which are not recorded on the balance sheet, might properly be regarded as a form of financing, like debt.

Converting the leases into debt using a method used by credit ratings agencies increases the value of Dart’s assets and also affects its operating profit, both of which alter the valuation.

Assets: Capitalising last year’s payments of ''22m at a plausible multiple, eight times, adds ''176m to tangible assets, now ''711m.

Operating profit: The lease payments of ''22m can be added back to operating profit, but since the company now ‘owns’ the assets for the purpose of the valuation, they must be depreciated. For a multiple of eight, 67% of the lease payments, or ''15m, should be charged. The difference between lease payments and depreciation is a ''7m gain, which after tax would be about ''6m. Add that to the original after tax operating profit of ''22m and we get ''28m.

That’s a return of ''28m on tangible assets of ''711m, still 4%. Using the same method, for a 10% return, an investor will be looking to pay 60% less than tangible asset value, or ''284m.

But he will also assume a debt, the capitalised lease obligations, of ''176m, which added to the market capitalisation (the market value of the equity) is ''286m.

The price is almost exactly the same as my final estimate of value.

This calculation is very sensitive to the level of lease payments, which jumped more than 50% last year. It also means treating all operating leases as though they were assets of the company, which seems justifiable in the case of planes and property on very long leases that might be difficult to dispose of, but perhaps not for smaller items of machinery. Since it also treats all cash as capital required by the business, it’s probably over cautious.

But the value of Dart is probably a lot closer its enterprise value (market capitalisation plus debt) than I thought when I wrote "Dart: All time record holder for value".

It could even be fairly valued, and if that’s true, I won’t be the only disappointed value investor. Dart has become something of a tautology: a fashionable ‘value’ stock in the blogosphere.