Valuation Flashcards
What are the two broad categories of evaluations?
Intrinsic (NPV, Liquidation, LBO etc.) and relative/ extrinsic (public comps, precedent deals)
What industries is a DCF not standard for
Asset-centric industries: banks, insurance, REIT
When is a DCF the best for valuation
mature businesses with stable cash flows
When doing extrinsic/ relative analysis, what characteristics should you limit for
Industry, Financial Metrics, Geography and Time
What types of public comps and precedent transactions are there
M&A premiums - analyze how much was offered/ accepted for previous deals relative to the equity value
Future Share Price Analysis - project share price a few years in advance based on a multiple like P/E (share price per per share earnings) and projected earnings, then discount back (TVM) to current
Sum of Parts - Split a company into segments and analyze each segment based on comps with publics
What are some of the common multiples/ metrics?
P/E (Price per S / Earnings per S, Equity Value / Net Income) - Used for many companies, great for financial institutions, distorted by non-cash expenses. This is probably the worst one.
Enterprise/ EBIT - Used for many companies, better than Ent/EBITDA for industries where assets are important to business success
Enterprise/ EBITDA - Used for many companies, better than Ent/ EBIT for industries where assets are not important to business success
Equity/ Levered FCF - Not widely used, requires work and STRONGLY effected by capital structure
Enterprise/ Unlevered FCF - Used when CapEx or operational accounts have large effect. Probably most accurate.
Book Value Multiples - Equity Value / Book Equity Value
What metrics are common to certain circumstances
Enterprise/EBIT or EBITDA is quick, common and good comparability
Equity/ FCF is more accurate but not standardized and more work
What is a common Oil and Gas multiple
Enterprise/EBITDAX -> same as EBITDA except you ad back exploration costs as well. EV/ Proved Reserves and EV/ daily production
Describe public comps valuation and some of its pros and cons
To do a public comp you find publicly traded companies of similar finances, industry and country and then evaluate them for multiples relevant to their industry. You then apply that multiple to something on your BS, SCF or IS. It is good because it reflects the market price and is based on real companies but it is hard to find perfectly similar companies.
Describe precedent transaction evaluation and some of its pros and cons
You evaluate similar (finances, industry, country and time) companies based on what they were sold for (equity value = offer/ share * shares). Enterprise value can then be calculated and multiples can be determined relative to these valuations. Then apply these same multiples to your own company. This is good because it reflects the real market and real data. But it is often hard to find true comparisons given some of the corporations will be private.
Describe, in broad terms, a DCF evaluation and some of its pros and cons
You evaluate a companies historic IS and SCF to determine their cash flow, project it into the future and then discount it back to current time. This is good because it is tied directly to corporate performance and eliminates the bias of current market fluctuations or deals. This requires many assumptions and only really works on mature, stable companies.
Describe a liquidation valuation and some of its pros and cons
Liquidation valuation is A - L with adjustments made for current market prices and the costs to sell. The assumption is that you sell all your assets, pay of all your liabilities and have a portion left for your investors in the end. This doesn’t provide a great description of value and is more-so used for companies that are nearing bankruptcy.
Describe M&A premiums analysis and some of its pros and cons
Premiums analysis involves evaluating previous deals to see how much a company was sold for above its equity value. If you are public you can apply a similar multiple. If you are private you can determine a relative equity value and then apply your multiple to achieve a ‘deal value’. Data is spotty but it reflects market demand
Describe future share price analysis and some of its pros and cons
Future share price analysis involves using a multiple such as P / E of comparable companies with your future earnings to determine a future, pseudo share price. Then discount that value back to current day. This is nice because it reflects market growth but it relies on assumptions of multiples and on you finding a comparable company.
Describe sum of parts analysis and some of its pros and cons
If a company is diversified, split them into segments, evaluate each segment individually (via public comp or precedent transaction, assign multiples based on each segment and then combine. This is good because you can replicate some unique buyouts and are inputting more data specific to each part of your company. This is bad but a company may have some specific synergies that make them worth or they might be integrated such that the processes could not be split reasonably if that transaction occurred.
