Financial analysis amid creative destruction

1. Financial Analysis and Valuation –
Opportunities and Challenges
by
Dr Shantha P Yahanpath
Director, Agape International and Lecturer at Sydney Business School
Australia

2. Key issues
 Forecasting or guessing
 Historical background
 Development of theory
 Efficacy of models
 Practical relevance
 Paradigm shift and velocity of Change
 Future opportunities

3. Forecasting or guessing
A child was asked what her future
profession would be…and she replied…my
future profession is not here today…it is not
known to us today but it will be there when I
get there

4. Historical background
 Constant growth models
 Variable growth models
 CAPM - M Miller, Sharp, Lintner, Black and Scholes
 Price:earnings models
 Cashflow models
 Asset-based models
 Experience based models

5. Forecasting involves:
 Estimation
 Guessing
 Based on information available at the time of
forecasting

6. Theoretical issues
 Mathematical complexity by-passing plausibility
 Crude assumptions distorting the value of inputs
 Difficulty in valuing intangible assets like HR resources
eg. managerial talent, brand value
 Valuing corporate activity eg. M&A
 Impact of future competition

7. Efficacy of models depends on:
 Theoretical plausibility
 Explanatory ability
 Practical relevance
 Accuracy of parameter estimates
 Forecasting ability
 Simplicity

8. Practical relevance - accuracy
 Spread of valuation ranges
 Technological developments
 Changing business paradigms - velocity of
change
 Valuation of knowledge
 Effect of assumptions

9. Paradigm Shift – Intellectual capital rules
 Soil to steel and steel to software - agriculture to
manufacturing and manufacturing to information
technology
 Brains matter more than brawn - how much you know
maters more than how much you can lift
 Innovation matters more than mass production – a
product’s value is measured not in kilos but by the
weight of ideas that went into making it
 Information matters most of all – how easily it can
travel through the economy and how well it is used

10. Opportunities
 Participation of multi-disciplinary teams
 Problem oriented research
 Re-visit the past
 Challenge to academia - bring back relevance
 Invest more effort in alternative forecasting and
Bayesian approach
 Appropriate models for small businesses

11. Velocity of change – enemy or friend?
 Some models were developed during “industrialisation”
 Such models have been “creatively destructed” - models
have gone past their use by date
http://www.forbes.com/sites/jimblasingame/2012/10/08/managing-the-velocity-of-
change/
http://www.ey.com/Publication/vwLUAssets/EY_CIO_-_The_velocity_of_change/
$FILE/EY-CIO-The-velocity-of-change.pdf

12. Company Valuations
Is future past?
Back to Basics? Are we back to
judgemental approach?