Business Valuation - Methods Flashcards
What is the Asset-based approach?
Method of valuation using the balance sheet value of assets
Can be either Historic Cost (Balance Sheet value of equity) or Net Realisable Value (NRV of assets less liabilities)
What are the advantages of the asset-based approach
Simple to calculate
Assets are more certain than income
Useful for asset strippers to identify valuable fixed assets
What are the disadvantages of Asset-based approach?
Book values are likely to be out of date
Ignores the future earning potential of the company
Undervalues service businesses/businesses with high value intangible assets
What is the Income-based approach?
Method of valuation using the present value of the future cash flows of the business
What are the advantages of the income-based approach?
Technically the best method, especially for service businesses
Incorporates all available relevant cash flows and the time value of money
What are the disadvantages of the income based approach?
Estimated Cash Flows tend to be at the higher end of estimates - Could lead to overvaluation
Difficult to calculate a suitable discount rate in practice
What is the P/E ration valuation method formula?
Value = P/E*Earnings
What are the advantages of the P/E Method?
Reflects the stock markets view of the potential of the company
Considers the earnings potential of the company
What are the disadvantages of the P/E method?
Industry averages/proxy companies need to be used for unlisted companies - This may not be an accurate reflection of the company
Earnings can be manipulated by accounting policies
Past Earnings may not be indicative of future earning potential
What is the Enterprise Value Formula?
Enterprise Value = Enterprise value multiple x EBITDA
What is the Equity value Formula?
Equity value = Enterprise value - market value of debt + cash & cash equivalents
What are the advantages of the Enterprise value/EBITDA method?
Unaffected by capital structure or depreciation policies
Takes Net debt into account
Allows comparisons between companies with different policies
Most commonly used technique by investors
What are the disadvantages of the EV/EBITDA multiple method?
Very simplistic
Ignores Capex and tax - May not show a true reflection of the business
Past earnings may not reflect future earnings potential
Use of industry average/proxy may not properly reflect the company being valued
What is the Dividend yield method?
Dividend yield = Dividend per share/Market price per share x 100
Rearrange to find the share price for unquoted companies
What is the dividend valuation method?
The present value of future dividends
