Valuation Techniques

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Valuation Techniques

• Balance sheet analysis,
• Income statement multiples, and
• Discounted cash flows

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(1) Balance sheet analysis
Balance sheet
Current assets Current liabilities Fixed
assets Long-term liabilities Other assets
Shareholders equity
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(1) Balance sheet analysis

• a) Book value
• b) Adjusted book value
• c) Liquidation value

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(2) Income statement multiples

• Before dealing with income statement multiples,
  what do we mean with income statements?
• An income statement is a financial statement
  that summarises revenues and expences (costs)
• Chap 17, Dorf Byers

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Statement of Income

• Net sales
• - Cost of goods sold
• Gross profit
• Other costs (payable)
• EBITDA (operating profit)
• Amortisation
• EBIT

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For all practical purposes

• R Q P
• TC FC VC
• EBITDA R - VC - FC (payable)
• EBIT R - TC

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Measures of profitability

• These measures of profitability based on
  operations (Gross profit, PBT, PAT, EBITDA and
  EBIT)
• Other profitability measures based on assets may
  be Return on Investment (ROI), Return on Equity
  (ROE), etc.

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(2) Income statement multiples

• PBT
• PAT
• EBIT
• EBITDA
• EBITDA is the most used see Exhibit 4 for
  some examples of multiples in use

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Method

• Identify a company with known value
• Calculate multiples based on various profit
  measures (EBIT, EBITDA)
• Apply these multiples on the company under
  consideration

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(3) Discounted Cash Flows

• Cash flow may be defined as the sum of
  retained earnings minus the depreciation
  (amortization) provision made by a firm.
• If a cash flow statement reveals projected
  negative cash in some period it will be
  necesarry to plan for a capital infusion
• Chap. 17, Dorf Byers

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(3) Discounted Cash Flows

• Project the cash flow stream
• Chose a discount rate
• Determine a terminal value
• Calculate the present value

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Which method is best?

• (1) Balance sheet method?
• (2) Income statement multiples method?
• (3) Discounted cash flow method?