Valuation Flashcards
How do you calculate Liquidation Value (Net Asset Value)?
Total Asset Value - Total Liability Value
When would a DCF not be very useful?
Asset heavy industries
Cash flows are unpredictable (b/c high growth industry or on brink of bankruptcy)
When are public comps and precedent transactions not very reliable?
Data is spotty
The company is unique and can’t be compared easily to others
Liquidation Value (Asset-Based Valuation)
Value the company’s assets and assume they are sold to repay its liabilities, and then whatever remains goes to equity investors and company’s equity value
M&A Premiums Analysis
Select precedent transactions but calculate the premium the buyer paid for the seller (what % over the share price)
Future Share Price Analysis
Project a company’s future share price based on the P/E or other multiple of comparable companies and discount it back to its present value
Sum of The Parts
Split a company into different segments, pick different sets of public comps and precedent transactions for each, assign multiples, value each division separately, and then add up all the values at the end to determine the company’s total value
LBO Analysis
Assume a private equity acquires a company and needs to achieve a certain Internal Rate of Return (IRR), and work backwards to calculate how much they could potentially pay to achieve that return
When is EV/EBIT used?
Most useful for companies where CapEx is more important to factor in (Since D&A follows CapEx closely)
When is EV/EBITDA for?
Most useful for companies where CapEx and D&A are not as important
When is P/E used?
Most relevant for banks and financial institutions; distorted by non-cash charges, capital structure, and tax rates
When is EV/Unlevered FCF used?
Used when CapEx or changes in Operational Assets and Liabilities such as Deferred Revenue have a big impact
Why is P/E seldomly used?
Includes non-cash charges and is impacted by tax rates and capital structures
What are some “issues” with the FCF multiples?
Take more time to calculate
May not be standardized (companies include different items in CFO section of CF Statement)
Book Value Multiples (P/BV)
Tell you haw valuable a company is relative to its Balance Sheet. Seldom used because companies balance sheets are far different than their true market value.
Equity Value/Book Value
Price per Share/Book Value
How to value based on multiples (comparable companies)?
Once you’ve calculated all the relevant multiples, you normally find the minimum, maximum, median, 25th percentile, and 75th percentile each year then apply them to the company’s own financial figures
Does a valuation tell you how much a company is worth?
No, a valuation gives us a range of possible values of a company
Why might we not want to use liquidation value to value a company?
It’s useful for most healthy companies because it tends to produce extremely low valuations
Why might it not be ideal to use a future share price analysis?
It is highly dependent on future assumptions.
Which valuation method tends to produce the lowest valuation?
Liquidation value will produce the lowest value 99% of the time because most companies are worth significantly more than what their balance sheet would suggest
Growth Rate x Relevant Multiples Relationship
Higher Revenue Growth = Higher Revenue Multiple
Higher EBITDA Growth = Higher EBITDA Multiple
*All else equal
PEG Ratio
P/E divided by EPS growth
Accounts for growth to get a better view of company’s real value
When are multiples most useful when valuing companies?
When growth rates and margins are in similar ranges
Why are EV/Revenue and P/E multiples taken least seriously?
A company should be valued based on its profits, not its sales
P/E is subject to non-cash and non-recurring charges
What are some reasons company valuations may be valued different than what their financial statements suggest?
Employees, IP, legal rulings, product benefits, recent news and announcements
Owning vs. Leasing a building - impact on EBITDA
When you own a building, it will have a depreciation and interest expense (from the mortgage) associated with it (neither of which are reflected in EBITDA. If you’re leasing a building, the rental expense will show up in EBITDA and reduce it.
What should you do it a company has no profit and/or revenue?
You can still use revenue multiples or CF based multiples
DCF wouldn’t be as useful unless you can project CFs far into the future
If a company has no revenue, what are some multiples we could use?
Alternative metrics and multiples
EV/Unique Visitors or EV/Registered users
What is an advantage of leasing buildings rather than owning them?
When leasing a building, the rental expense shows up as an operating expense lowering EBITDA. When analyzing profitability ratios such as EV/EBITDA, the multiple would be higher for the firm leasing the buildings.
Why would an investor prefer analyzing EBIT multiples to EBITDA multiples?
EBITDA hides the CapEx companies make and disguises how much cash they require to finance their operations.
Capital-Intensive and Asset-Heavy businesses will show a large disparity
What are some problems with EBITDA and EBITDA multiple?
It hides the amount of debt principal and interest a company is paying each year
Ignores working capital requirements (AR, Inventory, AP) which can be very large
Companies like to add back many charges and expenses to EBITDA so you never really know that it represents unless you dig deep
Can EV/EBITDA be higher than EV/EBIT?
No, by definition, EBITDA must be greater than or equal to EBIT (can’t have a negative depreciation amount)
Does an LBO give you a specific valuation?
No, an LBO gives you a target IRR and then you back solve for how much you can pay for the company
What are some of the flaws with public comparable companies
No stock is 100% comparable
The stock market is “emotional” and ,multiples might be dramatically higher or lower depending on the market’s movements
Share prices for small and thinly traded companies may not reflect their true value
What is a fairness opinion?
Right before the deal closes with a public seller, a financial advisor will create a “fairness opinion” justifying the acquisition price and directly estimate the company’s valuation
Why would a company with similar growth and profitability be valued at a premium relative to its comparable companies?
Recent good news
Significant IP or competitive advantage not reflected in financials
Could’ve won a major lawsuit
Two companies have the same financial profiles (revenue, growth, and profits) and are purchased by the same acquirer, but the EBITDA multiple for one transaction is twice the multiple for the other transaction - how could this happen?
One of the processes was much more competitive
Recent technical development in the space that increases the value
Once company may have had recent bad news that depressed its stock price
Different accounting standards
How would you value a company with no profit and no revenue?
Use comparable companies and precedent transactions but use more “creative multiples” like EV/Unique Visitors”
P/E Multiple of 20x
$1m in earnings
What is the company worth?
Not $20m. Give a range ($15 - $25m). Maybe give higher or lower range depending on whether the company is overperforming or underperforming relative to its peers
$20/shr
20x P/E
$1.00 EPS
10m shares outstanding
If company does a 2-for-1 tock split. How do P/E multiple and valuation change?
They don’t change –> 10m shares outstanding to 20m shares outstanding
EPS and Share Price both fall so P/E is still 20x
M&A Premiums Analysis Walkthrough
1) Select Precedent Transactions (based on industry, date, and size)
2) For each transaction, get the seller’s share price (typically 1month before deal was announced)
3) Calculate the 1 month premium (per share purchase price/share price 1 month ago)
4) Get the median and then apply to the company you’re valuing
Future Share Price Analysis Walkthrough
Project a company’s share price 1-2 years from now and then discount back to present value
1) Find median historical (TTM P/E of public comparable)
2) Apply this P/E multiple to company’s 1-year and 2-year forward projected EPS to get implied future share price
3) Discount back to present value by using discount rate that is in-line with the company’s cost of equity
