Uday Damodaran

XLRI Jamshedpur

Session 5:
Financing And Valuation: Where Does
Value Come From? Part II

BM 15-17: FM II
Session 5

Uday Damodaran
XLRI Jamshedpur

We Continue.

To search for that key to valuing businesses

A tribute to Glenn
Frey of The
Eagles?

BM 15-17: FM II
Session 5

Uday Damodaran
XLRI Jamshedpur

Du Pont Ratio Analysis

ROE = PAT/S Funds

=PAT/S * S/Total Assets * Total Assets/S Funds

Net Profit Margin

Asset Turnover Ratio

Another variation of
Debt/Equity

X=a*b*c

BM 15-17: FM II
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Uday Damodaran
XLRI Jamshedpur

Therefore.

How do you create value?

BM 15-17: FM II
Session 5

Uday Damodaran
XLRI Jamshedpur

Value Creation

For my bookshop what should I focus on?

BM 15-17: FM II
Session 5

Uday Damodaran
XLRI Jamshedpur

Du Pont Ratio Analysis

ROE = PAT/S Funds

=PAT/S * S/Total Assets * Total Assets/S Funds

Net Profit Margin

Asset Turnover Ratio

Another variation of
Debt/Equity

X=a*b*c
How do I improve margins?

BM 15-17: FM II
Session 5

Uday Damodaran
XLRI Jamshedpur

Du Pont Ratio Analysis

ROE = PAT/S Funds

=PAT/S * S/Total Assets * Total Assets/S Funds

Net Profit Margin

Asset Turnover Ratio

Another variation of
Debt/Equity

X=a*b*c
How do I improve this?

BM 15-17: FM II
Session 5

Uday Damodaran
XLRI Jamshedpur

Allow me.

My Shop!

BM 15-17: FM II
Session 5

Uday Damodaran
XLRI Jamshedpur

Value Creation

Steel, Aluminum, Sugar, Cement..

And therefore cost leadership!
And, at the other end of the spectrum?

Or cartels!

BM 15-17: FM II
Session 5

Uday Damodaran
XLRI Jamshedpur

Value Creation

Steel, Aluminum, Sugar, Cement..

And therefore cost leadership!
And, at the other end of the spectrum?
LOreal, P&G, Unilever, Starbucks
And therefore product differentiation!

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Session 5

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Uday Damodaran
XLRI Jamshedpur

Parichay, XL student venture

www. parichay .co. in

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Uday Damodaran
XLRI Jamshedpur

Investor Value: What Constitutes It?

Our first marker was returns, but .

Is it enough to try and maximize returns?

What are we
missing out on,
when we look
at returns?

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Uday Damodaran
XLRI Jamshedpur

Putting our thoughts together...

Value is created when:
ROE> Cost of Equity or
ROCE > WACC i.e., when
(PAT + I)/ CE > WACC
NOPAT/CE > WACC or (multiplying both sides by CE)
NOPAT > WACC * CE orsimplifying further?

Importance of
Value Creating
Scale!!

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Session 5

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Uday Damodaran
XLRI Jamshedpur

Scale

Scale! So, so important

Again, an Xlers planned venture

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Session 5

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Uday Damodaran
XLRI Jamshedpur

Putting our thoughts together...

Value is created when:
ROE> Cost of Equity or
ROCE > WACC i.e., when
(PAT + I)/ CE > WACC
NOPAT/CE > WACC or (multiplying both sides by CE)
NOPAT > WACC * CE or
NOPAT (WACC * CE) > 0 or
Called the
Economic Value Added
(EVA)

EVA > 0

Focus on the right

absolutes; not customer
base, sales alone
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Uday Damodaran
XLRI Jamshedpur

Investor Value: What Constitutes It?

Our Second Marker, Scale! High Returns on Investment on a

Large Scale
Not Revenues, Not Profits, not even just returns
But high returns on a large scale!

Your Business?
Did you talk
about scalability?
Bladelogic!

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Uday Damodaran
XLRI Jamshedpur

Investor Value: What Constitutes It?

We have got two markers now, (high) returns and (large) scale
But is that enough? What else do we need to seal value, to
lock up value?
ROE, ROCE, EVA etc. are single period measures; in order to
create value, the business has to sustain this year after year
after year!
Shall we try to
represent this in
a graphic?

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Uday Damodaran
XLRI Jamshedpur

Valuation: Koller, Goedhart & Wessels

Est. ROCE

Competitive
Pressure
Peak ROCE

Sustainability

WACC

The C.A.P.
Time

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Uday Damodaran
XLRI Jamshedpur

Valuation: Koller, Goedhart & Wessels

And, make
it big!

Est. ROCE

Competitive
Pressure
Peak ROCE

Sustainability

WACC

Time

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Uday Damodaran
XLRI Jamshedpur

Investor Value: What Constitutes It?

We have got two markers now, (high) returns and (large) scale
But is that enough? What else do we need to seal value, to
lock up value?
ROE, ROCE, EVA etc. are single period measures; in order to
create value, the business has to sustain this year after year
after year!
And now shall we
try to capture all
this in a neat MBAlike math formula?

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Uday Damodaran
XLRI Jamshedpur

We Continue.

To search for that key to valuing businesses but we always

had the key!
The NPV does everything! Captures adequacy of returns,
scale, sustainability, timing!
And the NPV = PV of EVAs!

So often in time it happens, we all live our life in chains, and we never
even know we have the key! The Eagles, Already Gone
A tribute to Glenn Frey of
The Eagles!!!

BM 15-17: FM II
Session 5

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Uday Damodaran
XLRI Jamshedpur

Investor Value: What Constitutes It?

We have got two markers now, (high) returns and (large) scale
But is that enough? What else do we need to seal value, to
lock up value?
ROE, ROCE, EVA etc. are single period measures; in order to
create value, the business has to sustain this year after year
after year!
And now shall we
try to Excel it!

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Uday Damodaran
XLRI Jamshedpur

Group Assignment
Business Plan
What would your ROE graph look like, over time?
What would be your primary source of competitive
advantage/value? Re-work your earlier submission detailing
your source of advantage a little more
File name: Name your submission file name as
Submission2a_SectionX_GroupYY where X= A,B or C and YY =
Your Group Number

Deadline: Midnight, Wednesday, 27th January

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