L11 Valuing and Evaluating Assets Flashcards
Evaluation vs Valuation
Evaluation:
- considers all aspects of a business excluding its monetary value
Valuation:
- calculation of the monetary worth of a business or an asset
- a valuation can be used to support an investment decision
What can be decided from an evaluation?
an evaluation can be used to determine the validity of a business plan or a revenue model with a view to discontinuing or modifying a business plan (or corporate structure)
An evaluation may be used to partly support an investment decision
Classification
Classification, or grouping companies by attributes or common features provides a basis for:
- creating and applying relevant measures of performance
- comparison of business plans, strategies, structures
- competitor analysis
Categories of classification
see onenote
- age/maturity profile
- broad sector
- regulatory pathway
- revenue model
- technology
- specification of use
- corporate status and focus
- sales model
- sales frequency and price (value)
- product use frequency
Classification flow diagram
see onenote
What needs to be assessed - Reward
Reward requires the examination of:
- market opportunity according to addressable, accessible, value and contestable markets (by value and unit sales, by frequency of transactions)
- drivers of demand (demographics, customer needs)
- acquisition potential (demand for business, income streams, new customers, partially developed assets or patents)
Addressable
the total pool of customers (patients) who could benefit from a product
Accessible
the pool of customers (patients) who can pay for a product or be reimbursed
Value
the market defined by sales actually achieved
Contestable
the pool of customers (patients) who have, directly or indirectly, the ability to switch between existing and new products
Contestability determined by:
- number of existing products or services
- entrenchment of existing products and brands
- degree of benefit/s of newer products
- number and size of existing firms
- entrenchment of industrial base (status quo)
- degree of learning required
- resistance of opinion followers
- proximity of displacement or enabling technologies
- queue factors (order of place, num. members)
What needs to be assessed - risk
see onenote slides and side notes
- capabilities
- capital resources
- staffing
- performance history
- business plan
- competitiveness
- IP
- manufacturing
- competitor intensity
- presence or influence of orthodox values, structures and guidelines
- corporate structure
- owners of the business
- corporate domicile and laws governing the operations of the firm
- territorial considerations
- governance
- communication capabilities
- commitments, obligations and liabilities
- time
Information Sources
see onenote slides
Limitations
- the problem of confidentiality
- information asymmetry
- information overload
- making and using estimates - the need to approximate
Some considerations
- management pride and bias
- management misrepresentation
- maintaining objectivity
Writing an evaluation report
see onenote
Classifications, Valuation Methods Overlay flow diagram
see onenote
Price/Earnings Ratio
see onenote
- the ratio of a company’s share price to its earnings (net profit after tax) and it is equivalent to the capitalisation of the company (number of shares on issue multiplied by its share price) divided by its net profit after tax (NPAT)
- describes how many years of earning it would take to cover the share price i.e. to pay it back
A high PE of 30 in effect means 30 years twice as long as a PE of 15 HOWEVER high PEs usually signal higher sales growth, which implies a shorter payback period
Price/Sales Ratio
see onenote
- the ratio of a company’s share price to its sales per share and it is equivalent the capitalisation of a company divided by its sales
PS Ratio can be used to compare a company with traded shares with any other listed company
Asset Valuation - a simplified example
see onenote slides
pNPV modelling
see onenote
NPV = net present value
The influence of risk on an asset under development can be explored in a probability adjusted NPV model
Conclusions
The evaluation process can lead to the discovery of weaknesses, unaddressed risks and new unknowns; such results be used by business owners and managers to improve the business, help investors review investments or uncover and rank new investment prospects
a valuation can support the investment process by providing a range of estimates of monetary worth
