INTRODUCTION

TO VALUATION
METHODS
(GROUP 1)
 FOUNDATIONS OF VALUE AND
FUNDAMENTAL PRINCIPLES OF
VALUE CREATIONS

2
 Foundation of Value

O Value is created through an organization’s

business model, which takes inputs from the
capitals and transforms them through
business activities and interactions to
produce outputs and outcomes that, over
the short, medium and long term, create or
destroy value for the organization, its
stakeholders, society and the environment.
 Based upon the work of the Economists
Georgescu-Roegen: a pattern of matter, energy
and/or information has economic value if the if
the following three conditions are jointly met:

O Irreversibility
O Entropy
O Fitness
 Fundamental Principles of
Value Creation

O Fundamental Principles of Value Creation –

Companies create value by investing capital
to generate future cash flows at rates of
return that exceed their cost of capital. The
faster they can grow and deploy more
capital at attractive rates of return, the
more value they create.
O Fundamental Principles of Value Creation
the principles imply that a company’s
primary task is to generate cash flows at
rates of return on invested capital greater
than the cost of capital.
O Companies create value for their owners by
investing cash now to generate more cash in
the future.
O That means the amount of value a company
creates is governed ultimately by its ROIC,
revenue growth, and of course its ability to
sustain both over time. Fundamental
O Basically, without clearly understanding the
principles of value creation within their
organization, executives’ risk being unable
to identify underlying drivers of
performance and will focus on driving short
term improvement initiatives which deliver
short term benefits, but not long-term
value.
 INTRODUCTION TO
VALUATION METHODS
 What is Evaluation?

O In finance, valuation is the process of

determining the monetary worth of
something.
O Valuation refers to the process of
determining the present value of a company
or an asset.
O The value could be of:
* Intangible assets
* Tangible assets
 Common Valuation Methods

O Three main valuation methods

(1) DCF analysis
(2) Comparable company analysis
(3) Precedent transactions.
 Discounted Cash Flow
Analysis

O Discounted Cash Flow (DCF) analysis is an

intrinsic value approach where one
forecasts the future business cash flow and
discounts it back at present day.
O It is the most detailed of the three
approaches
O Produces the highest value which also often
result in the most accurate valuation.
O DCF values a company by projecting its
future cash flows and then using the Net
Present Value (NPV) method to value the
firm.
O A company’s worth is equal to the current
value of the cash it will generate in the
future, and DCF is a framework for
attempting to calculate exactly that.
 Comparable company
analysis

O Comparable company analysis is the

process of comparing companies based on
similar metrics to determine their
enterprise value.
O A company's valuation ratio determines
whether it is overvalued or undervalued.
O The most common valuation measures used
in comparable company analysis are
enterprise value to sales (EV/S), price to
earnings (P/E), price to book (P/B), and
price to sales (P/S).
O It requires that the comparable companies
have publicly traded securities, so that the
value of the comparable companies can be
estimated properly.
 Precedent transactions
analysis

O Precedent transactions analysis is where

you compare the subject company to other
businesses that have recently been sold or
acquired in the same industry.
O Generally fairly easy to perform.
O A Precedent Transaction analysis is almost
always the theoretically correct
Comparable Company analysis to perform.
O Precedent Transactions are designed to
attempt to ascertain the difference between
the value of the comparable companies
acquired in the past before the transaction
vs. after the transaction.
O When a change of control is occurring,
Precedent Transaction analysis should
typically be one of the valuation methods
used.
 Other Valuation
Techniques
 
O Leveraged Buyout (LBO)
 A leveraged buyout model, or an LBO, is a type of company
acquisition where total acquisition proceeds are financed with
a substantial portion of borrowed funds. There are two parties
involved in a leveraged buyout –the buyer company & the
target company.

 LBOs are typically used by “financial sponsors” (private

equity firms) who are looking to acquire companies
inexpensively in the hopes that they can be sold at a profit in
several years.
 
 Net Asset Value (NAV)
Method

O The Net Assets Method represents the value of the business with
reference to the asset base of the entity and the attached liabilities on
the valuation date. The Net Assets Value can be calculated using one of
the following approaches

1. At Book Value
 This method would only give the historical cost of the assets and may
not be indicative of the true worth of the assets in terms of income
generating potential
 
2. At Intrinsic Value
 The intrinsic value of assets is worked out by considering current
market/replacement value of the assets.
 
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AND GOD
BLESS!