Different Methods of business valuation.

1. BUSINESS VALUATION
WORKSHOP
DAY-2

2. VALUATION
MULTIPLE
Valuation multiples are financial
measurement tools that evaluate
one financial metric as a ratio of
another
This helps to make different
companies more comparable.
Investors use this method to
compare the relative ratios of
similar industries.

3. TYPES OF VALUATION MULTIPLES
Equity Multiples
• P/E Ratio
• Price/Book Ratio
• Dividend Yield
• Price/Sales
Enterprise Value Multiples
• EV/Revenue
• EV/EBITDAR
• EV/EBITDA
• EV/Invested Capital

4. ENTERPRISE
MULTIPLE
• Enterprise value multiple is the comparison
of enterprise value and earnings before
interest, taxes, depreciation and
amortization.
• Enterprise multiple can be used to compare
the value of one company to the value of
another company within the same industry.
A lower enterprise multiple can be
indicative of undervaluation of a company.

5. ENTERPRISE
VALUE
• Enterprise value (EV) is a
measure of a company's total
value, often used as a more
comprehensive alternative to
equity market capitalization.

6. ENTERPRISE MULTIPLE

7. Enterprise
Multiple
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problem

8. ANALYZING THE HISTORICAL PERFORMANCE
Understanding the past
performance of the
company from its financial
statements
This provides a good
foundation for forecasting its
future.
This works on the principle
of economic performance
instead of accounting
performance.
Various financial ratios are to
be calculated to get the final
result

9. STEPS INVOLVED
• Computation of OIC
STEP-1
• Computation of NOPLAT
STEP-2
• Computation of ROIC
STEP-3
• Computation of NI
STEP-4
• Computation of FCF
STEP-5
• Computation of Financial Flow
STEP-6

10. Operating Invested Capital
• Invested capital is capital invested in a company by debtholders and
shareholders
OIC consists of net fixed assets deployed in the operations plus net
operating working capital
OIC = Total assets – non-operating Fixed Assets like surplus land – Excess cash and
marketable securities

11. NOPLAT
• Net operating profit less adjusted taxes (NOPLAT) is a financial
metric that calculates a firm's operating profits after adjusting for
taxes.
Where
EBIT = NP + Non-operating expenses -Non-operating incomes
NOPLAT serves as a better indicator of operating efficiency than net
income.
NOPLAT = EBIT – Taxes on EBIT

12. ROIC
• ROIC stands for Return on Invested Capital and is a profitability or
performance ratio that aims to measure the percentage return that a
company earns on invested capital.
Where
Operating Invested capital = Invested capital at the beginning or
Average capital
The ratio shows how efficiently a company is using the investors’ funds
to generate income
ROIC = NOPLAT/Operating Invested capital

13. Net Investment
• Net investment is the total amount of money that a company spends
on capital assets, minus the cost of the depreciation of those assets.
• Alternatively,
NI = (Net FAs at the end + Net CAs at the end) – (Net FAs at the
beginning + Net CAs at the beginning)
Net investment = Gross investment – depreciation

14. Free Cash Flow
• Free cash flow (FCF) represents the cash available for the company to
repay creditors or pay dividends and interest to investors
• Free cash flow is a post tax cash flow generated from the operations of
the firm after providing for investments in fixed assets and net current
assets required for the operations of the company
FCF = NOPLAT – NI

15. FINANCING FLOW.
• The cash flow available to investors are known as financing flow.
Where,
Non-operating cash flow is NOCF adjusted to tax
FF = FCF + Non-operating cash flow

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Practical Problem