Baby steps in valuation
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Covers the key concepts of valuation - why value companies, the 3 valuation approaches, and the strategic insights you can get and suggest a valuation framework to use.
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2. Super Profits Method - Goodwill is calculated as the super profits (profits above normal rate of return) multiplied by the agreed number of years of purchase.
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Dear Dr. Kornbluth and Mr. Gorenberg,
The US House of Representatives is deeply concerned by ongoing and pervasive acts of antisemitic
harassment and intimidation at the Massachusetts Institute of Technology (MIT). Failing to act decisively to ensure a safe learning environment for all students would be a grave dereliction of your responsibilities as President of MIT and Chair of the MIT Corporation.
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This will be used as part of your Personal Professional Portfolio once graded.
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Baby steps in valuation
- 2. I am sharing one framework that came from many years of trials and tribulations Worried? Its OK
- 4. Valuation – retail investor perspective No one answer Triangulate from several angles Keep it simple. Don’t lose forest from trees
- 5. Core of value investing Buy a bargain Buy at a price that is at a discount to its value. Look here to find out about value investing i4value.asia What is it worth? Look here to find out about valuation i4value.asia
- 6. What is value? Value = Market Price Efficient Market School Value = Discounted cash flow Value = Market Price Value Investing School
- 7. Why value companies Value Price • To raise funds through new shares • Ensure share buyback at reasonable price • For M&A • For Senior management compensations To buy a bargain Investor Company
- 8. Valuation – 3 approaches Basis House purchase analogy Relative valuation Your house is worth the same as your neighbour’s house Asset based Your house is worth the cost to buy the land and build it Earning based Your house is worth the rent you get over its life
- 9. How to learn valuation • Understand concepts & methods • Practice, practice, practice
- 10. Picking out value traps Value traps – stocks that appear cheap but are really cheap for a reason Valuation is key to picking out value trap 2 sides of valuation coin • Wrong assessment = value trap • Correct assessment = bargain BARGAIN VALUE TRAP
- 11. Valuation Framework 2 basic approaches: • Asset-based • Earning-based Compliment with metrics from academia and industry thought leaders • Acquirer’s Multiple • Magic Formula
- 12. Asset-based valuation Asset as a store of value Information extracted from Balance Sheet
- 13. Earning-based valuation Using asset to create value Information extracted from P&L and Cashflow
- 14. Gain strategic insights $ Asset Value Earning Value Compare Asset Value with Earning Value
- 15. Gain strategic insights - Scenario 1 $ Asset Value Earning Value Competitive environment = Company earns its cost of capital
- 16. Gain strategic insights - Scenario 2 $ Asset Value Earning Value Assets underutilized > Poor management OR Secular decline
- 17. Gain strategic insights - Scenario 3 $ Asset Value Earning Value Economic Moat < Return exceeds its cost of capital
- 18. Analyze specific components If there are problems with the source of the financial statements, there would be issues with the respective valuation Asset value Build up from Balance Sheet Earning Value Build up from Income Statement
- 19. Valuation Framework - Recap Asset Value Earning Value Magic Formula Acquirer’s Multiple Valuation i4value.asia For definitions look here
- 20. Acquirer’s Multiple Value metric financial acquirers use to find takeover targets. Enterprise value / Operating earnings = Target multiple < 6 &
- 21. Magic Formula Return on Invested Capital Earnings yield + Look for companies that rank in the top quartile based on the Magic Formula Avoid those where Magic Formula < 20 %
- 22. Special cases in valuation Large cash balance - treat as non operating assets Large intangibles eg brand - Ignore as already part of Asset value or Earning value
- 23. Special cases in valuation Holding company - Use Sum of parts valuation Cyclical or Project based companies - Take average value over the cycle See case study i4value.asia
- 24. Special cases in valuation Negative earnings – use Asset value or forecast turnaround for Earning value Companies in distress - Use liquidation value
- 25. Summary • Valuation is core of value investing ➢ Value trap and bargain – 2 sides of valuation • Triangulate value using a number of metrics ➢ Asset based (AV) ➢ Earning based (EV) ➢ Acquirer’s multiple ➢ Magic formula • Compare AV with EV for strategic insights • Handle special situations thru first principles Value Price ?
- 26. A site dedicated to learning how to invest through investment case studies i4value.asia Thank You