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Rosenbaum > Valuation Summary > Flashcards

Valuation Summary Flashcards

1
Q
  • How do you value a company?
A

Precent transactions, comparable multiples, DCF

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2
Q
  • When do you use each valuation method?
A

Want to use all three, but sometimes all wont be applicable. DCF wont really work with early stage startup, and if there are no comparable companies, the market based ones wont work

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3
Q

Which valuation method gives you highest valuation?

A

No methodology will always give highest value. Generally precedent gives higher valuation than public comps because of private company premium. DCF is most sensitive to inputs.

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4
Q
  • How do you select companies for public comps?
A

Geography, industry, financails (Revenue, EBITDA, market cap)

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5
Q
  • How do you select companies for precedent transactions?
A

Geography, industry, financials, time since transaction

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6
Q
  • How do you find information on companies?
A

10-K for annual, 10-Q for quarterly. Can also use equity research reports.

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7
Q
  • Problems with public comps?
A

Hard to find a perfectly comparable company, also stock market is cylical so will be reflected in share price

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8
Q
  • How would you value a lemonade stand? Tree?
A

Use market or intrinsic valuation, could still compare to comparables or value the cash flows from the business.

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9
Q

How to value a company with no profit?

A
  • If company has no profit, focus on revenue multiples rather than profitability multiples
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10
Q

How to value a company with no revenue?

A
  • If company has no revenue, use metrics that are more creative like EV / Unique Visitors
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11
Q

What other methods are there to value a company?

A
  • Other ways of valuing company? Sum of the parts, liquidation valuation, LBO
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12
Q

What would you use a valuation for?

A

Use internally to inform prospective clients, could also be pitching a company that you can get X for them, may also use it in marketing materials to prospective buyers when you are pitching the company to buyers.

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13
Q

What is calendarisation

A

Standardising report9ng periods of financial statements to allow for comparison

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14
Q

What are free cash flows to equity holders?

A

Cash flow from operating assets - CapEx + Net Borrowing.

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15
Q

Why is EBITDA used in valuation?

A

EBITDA is used as a valuation metric as it removes external accounting factors and non-operating expenses from view, focuses on the operating performance of the business and takes into consideration an approximate value of company cash flow.

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16
Q

What is working capital used for?

A

Looked at as a measure of a company’s near-term liquidity or operating efficiency.

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17
Q

What is book value?

A

Value of an asset determined by a company’s financial statements. Can be determined by looking at the balance sheet,

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18
Q

What is market value?

A

Value of an asset or entire business as determined by the market

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19
Q

Full formula for enterprise value

A

o Equity value + debt + capital lease obligations + preferred securities + noncontrolling interests + Other nonoperating liabilities (ie pension fund commitments) – cash and cash equivalents

20
Q

What are non controlling interests?

A

o Same thing as minority interests. Will add the equity value of the subsidiary that the company does not own, in order to allow comparisions between EBITDA and EV, as without this adjustement, EBITDA would include all sales

21
Q

Why do you use EV rather than equity value with EBIT or EBITDA?

A

o Because these are before paying creditors, so want to look at EBITDA as equity value would not be fair comparison

22
Q

Advantages of comparable company analysis?

A

o Most current of the three, as gives current market perspective.

23
Q
  • Disadvantages of comparable company analysis?
A

o May be difficult to find companies to compare. Markets as a whole may be undervalued or overvalued

24
Q

Advantages of precedent transactions?

A
  • Purchase price includes a premium, which could be advantageous if were looking to acquire a company
25
Q

Disadvantages of precedent transactions?

A
  • Historical analysis; may be irrelevant if in different market environment.
  • Difficult to find relevant transactions
  • Difficult to get data
26
Q

Advantages of DCF

A
  • Is mot technical; uses company-specific information
27
Q

Disadvantages of DCF

A
  • Terminal value accounts for significant proportion of overall valuation
  • Subject to projections, which could easily be wrong
  • Discount rate may be difficult to estimate
28
Q

Why is it important to remove cash from EV?

A

Leavues us with a value that represents the core operating assets of a business, and cash is already accounted for in equity value.

29
Q

Why is market value / EBITDA not good as a multiple?

A

Market value is the value of business after lenders have been paid; EBITDA is a metric before lenders have been paid

30
Q

`Formula for unlevered FCF?

A

Net Income + Non-cash expenses - increases in WC - Capex

31
Q

What is the WACC of a standard business

A

Around 9-12%

32
Q

What is the approximate market risk premium for the US

A

Around 6%, but depends on long-term returns of sp500.

33
Q

Which valuation method usually results in highest valuation?

A

Not a hard and fast rule, but often precedent transactions as it includes a purchase premium

34
Q

Why use EV/EBITDA rather than P/E?

A

EBITDA is before interest, and EV is before debt, so the EV/EBITDA metric is a better measure of a company’s core operations. This could results in more comparable m metrics as opposed to a P/E multiple, which includes the impacts of debts, depreciation and other income or expense items.

35
Q

Valuation of cement and steel companies

A

Steel & Cement represent basic/building materials. The sectors are cyclical (driven by expansion cycles). Being cyclical, in normal/bullish scenarios Comparables approach is best suited. However, in downturns it is better to shift to Asset based approaches to reflect maximum downside potential.

36
Q

Valuation of technology companies

A

Technology companies have very complicated business models where revenues are scattered & unpredictable, face constant threat of protectionism and so one simply cannot have a reliable long term forecast. Hence Comparables is chosen over DCF by most. However, we suggest the use of DCF in very bullish/bearish markets

37
Q

Valuation of telecom companies

A

The Telecom sector has rich & abundant data availability to generate very reliable numbers over a 3-5 year horizon and the business model can be very easily broken down into a flow of numbers. For this reason it is recommended to use the DCF approach. However, many analysts use Comparables to provide short-term targets.

38
Q

How to value retail companies

A

Although appearing to be simple, this is one of the most complicated sectors to value. The complexity is a result of distant breakeven, multiple formats, complex funding provisions (debt/lease/cash) and not-so-easily-quantifiable demand. This leads to a hybrid valuation approach often called SoTP Valuation

39
Q

Valuation of healthcare companies

A

Like telecom, these sectors too can be very easily broken down into a logical flow of numbers resulting in a reliable medium-long term forecast. Hence DCF is a rational choice. However, asset based approaches are a must in bearish markets to determine worst-case scenario valuation

40
Q

Valuation of infrastructure / power / oil&gas companies

A

Infrastructure, Power and Oil & Gas together form the Core Sector. These sectors are primarily driven by government policy and funding, the details of which are clearly made available. Having distinct drivers along with rich data availability make it a perfect DCF candidate. Asset valuation should be used as a support.

41
Q

Valuation of conglomerates

A

SoTP valuation is not an altogether different valuation methodology but just a combination of two or more traditional ones. The idea being, in case of a multi-business firm, certain business units may be better off valued using DCF while others may be valued using Comparables while some maybe valued with an asset based approach. The result of each shall be summed-up to determine the value of the firm as a whole. Sum Of The Parts (SoTP) can be used for multiple product lines, multiple business units or multiple subsidiaries. The choice of valuation for each unit must be based on strong rationale, rather than gut feeling (as discussed for the sectors above

42
Q

What valuation method would you use for start-ups?

A

Startups are driven by far too many factors to be captured by simplistic valuation models. Their sensitivity to economic factors, sector specific and company specific factors must be captured as far as possible to reasonably value them. These factors can only be captured with the DCF method

43
Q

How would you value high growth compnies?

A

High growth companies have drastically changing market shares and hence it is very difficult to compare them with a benchmark, making comparable valuation difficult and leaving one to go with the DCF approach

44
Q

How to value mature companies?

A

Matured companies have fairly predictable financials and hence DCF will result in a fairly reliable valuation. However, the Dividend Discount Model will also work reliably, as matured companies have nominal expansion needs and hence a high dividend payout ratio along with predictability of growth rates

45
Q

How to value cyclical companies?

A

Cyclical companies by virtue, have a very high degree of uncertainty. Secondly, such companies are always on the radar for news & management comment both of which are immediately reflected in Comparables. On the other hand, DCF may have to wait for a quarter or more to reflect a change

46
Q

How to value distressed companies?

A

Distressed company valuation, is particularly tricky as the challenge lies in finding fair value and not the lowest value! By distressed, we mean loss making companies or those that are restructuring their businesses by selling off ‘toxic assets’ and toning down capital structure. Traditional valuation approaches fail miserably as a result of the uncertainty involved and this is where Liquidation Value & Replacement cost method come to the rescue. Liquidation value measures return from selling off or liquidating the assets while replacement cost measures the opportunity cost of setting up a business

47
Q

How to value an IPO?

A

Although, for such situations it is best to use DCF as it determines the intrinsic value, not many will want to use it as it is likely to understate value as against Comparable valuation. Simply because, the idea behind an IPO is to raise maximum possible capital for a minimum dilution in equity! Hence most IPOs come out in bull markets where valuations are already stretched and comparable valuation will result in higher values as compared to DCF, as a result of circularity involved in such the approach. Consequently, you may notice that IPOs are ‘demand driven’ rather than intrinsic value; as a result many average companies get extraordinary valuations

Rosenbaum (11 decks)

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