pillars of wall street - valuation fundamentals - overview Flashcards
enterprise value
aka firm value
this is the value of the entire company to all its stakeholders
valuation
process of appraising the worth of a company or asset
value is different from price; price is what the asset costs but value is what it is actually worth (could be more or less than the price)
valuation is an art, not a science; different people will value the same asset differently
who uses valuation?
basically anyone making an investment decision
investment bankers use it to assist companies in corporate m&a activity and also to raise funding for the company (ECM and DCM)
equity research analysts use it to assign buy/sell/hold ratings for publicly-traded stocks
sales & trading department uses it to price securities before they buy or sell them
private equity investors (buyout professionals) use valuation to purchase companies at lowest possible price with maximum amount of leverage
restructuring professionals use valuation to impair assets and find residual value of a firm in order to liquidate it or restructure it
credit analysts look at a company’s credit profile to determine the quality of its assets in projecting its future cash flows
corporate business development professionals (corporate finance guys) use valuation in acquiring a division or entire company or divesting a division from their company
how do you do valuation?
you could look at the balance sheet, determine all of the various assets of the company and subtract from this amount the value of all of its liabilities
but this is cumbersome
there is an easier method:
net operating assets = invested capital of the business
meaning, you can take the sum of company’s equity outstanding and the amount of its debt, less its cash on hand; this as a proxy for its net operating assets (meaning assets - liabilities)
to reiterate, equity + debt - cash = net operating assets = assets - liabilities
the accounting equation
net operating assets = operating assets - operating liabilities
a simpler way to calculate net operating assets is by using invested capital
invested capital = shareholders’ equity + financial liabilities - financial assets
if you think about it, this is just a rephrasing of the old “equity = assets - liabilities” equation
*but value is relative; you can’t just do the calculations of net operating assets or invested capital above and assume you have the value of the company; all companies have off-balance sheet value; this is why there is debate in financial markets about what a company is worth and everyone doesn’t uniformly agree all the time
off-balance sheet value
an example would be coca cola’s brand name; it’s not in the balance sheet, but there is obviously some benefit that coke derives from its brand name
off-balance sheet value of the coke brand is offset by the incremental equity that the stock market and investors say it is worth; if the value of coke’s brand decreased for some reason (say, a scandal), this would be reflected in the company’s stock price (incremental equity decreases)
enterprise value vs. equity value
enterprise value: aka firm value market value of net operational assets claims on assets from both debt and equity holders (meaning the amount of company's value available to all its stakeholders) [equity value] + [net debt]
equity value:
aka market capitalization
aka residual value because it’s just what is available to the shareholders after debt holders have made their claim to their portion of a company’s assets
market value of shareholders’ equity (meaning the amount of company’s value available to only its shareholders)
[enterprise value] - [net debt]
four valuation methodologies
trading comparables
transaction comparables
discounted cash flow
leveraged buyout
there are others, but these apply in 80% of cases
fundamental vs. relative valuation methodologies
relative:
comparing price of an asset to the market value of similar assets
incl. trading comps. and transaction comps.
fundamental:
the intrinsic value of a company based on its future cash flows
incl. DCF and LBO
minority stake vs. majority stake valuation methodologies
minority:
valuation method for one share of stock of a company
incl. trading comps. and DCFs w/o synergies
majority:
valuation method that includes the benefits of a controlling interest in a company
(control means >=51%)
incl. transaction comps., LBOs and DCFs w/ synergies
why does a controlling interest have value?
because if you’re a majority stakeholder, you can make decisions that can create value in a company.
historically, market values control premium at 30%, so majority stake valuations are generally higher than minority stake valuations for this reason (but an exception to this is the LBO valuation methodology)
DCFs w/ synergies vs. w/o
synergies imply benefits from a transaction including cost savings and new revenues
