Valuation Techniques 1.Balance sheet analysis, 2.Income statement multiples, and 3.Discounted cash flows…

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Presentation transcript:

Valuation Techniques 1.Balance sheet analysis, 2.Income statement multiples, and 3.Discounted cash flows…

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

(1) Balance sheet analysis a) Book value b)Adjusted book value c)Liquidation value

(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

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

For all practical purposes R = Q * P TC = FC + VC EBITDA = R - VC - FC (payable) EBIT = R - TC

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.

(2) Income statement multiples PBT PAT EBIT EBITDA EBITDA is the most used; see Exhibit 4 for some examples of multiples in use

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

(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

(3) Discounted Cash Flows 1.Project the cash flow stream 2.Chose a discount rate 3.Determine a terminal value 4.Calculate the present value

Which method is best? (1)Balance sheet method? (2)Income statement multiples method? (3) Discounted cash flow method?