Valuation Flashcards
(14 cards)
When are relative valuations best used?
It is best used when there is a lot of good market data available and quality comparable companies exist.
It is not best when data is spotty and out of date, or when company is quite unique and can’t easily be compared to others.
When is intrinsic valuation best used?
Works well for stable, mature companies with predictable growth rates and profit margins.
It doesn’t always work well for high-growth rate startups, companies on the brink of bankruptcy, and other situations where growth and margins are artificially high, low, or unpredictable
What criteria do we consider in relative valuations?
There are two parts analysts need to take them into considerations:
One is Business Specific criteria:
- Sector/Subsector,
- Products/Services,
- Customers/End Markets,
- Distribution Channel (Supply chain)
- Geography
The second is Financial Criteria:
- Size of company,
- Growth Rate of Company,
- Profitability of company,
- Return on Investments,
- Credit Rating
AND for Precedent Transactions, you also need to consider Timing (after certain date).
What is liquidation valuation and when is it used?
Used as an asset-based valuation.
You find equity value by subtracting the cost of paying off liabilities from the value generated from selling assets. NET ASSET VALUE.
Often used when the company is undergoing a bankruptcy
What is an M&A Premium analysis?
M&A Premium Analysis is a valuation technique used in mergers and acquisitions (M&A) to determine the premium that a buyer is paying over the target company’s market price.
Why important?
- Helps acquirers justify the price they are paying.
- Provides insight into market trends and typical premiums in the sector.
- Assists shareholders in evaluating whether the offer is fair.
(paid $30 for a $20 company - 50% premium).
What is a future share price analysis?
Future Share Price Analysis (FSPA) is a valuation method used in M&A and investment banking to estimate a company’s potential stock price at a future date .
Often , first to project the company’s future share price based on its P/E and then discount it back to present.
Why important?
- Helps buyers and sellers evaluate potential upside in a transaction.
- Supports fairness opinions by estimating reasonable valuation ranges.
- Used in LBO models to determine exit multiples and IRR.
How do you analyze a company which has no profit or revenue?
If it is unprofitable, you can still potentially use revenue multiples or cash-flow based multiples, however a DCF may be useless unless you project it far into the future.
If there is no revenue you could:
1) Look at alternate metrics (TEV/unique visitors, TEV/registered users)
2) For biotech or pharma, create a far-future DCF since potential profits may be more realizable based on past pharma performance and market size.
How do you conduct a precedent transactions/comparable companies analysis?
First you create a universe peer company set based on business and financial criteria (also timing criteria for precedent transactions too).
Next, you determine appropriate metrics and multiples for the companies or transactions and ranks these based on minimum, 25th, 75th percentiles, and maximum values.
Then, you benchmark your target against these valuation multiples to determine a potential valuation range for your target, from which you can determine a potential share price range for the target
What are some common multiples for precedent transactions/comparable companies analysis?
Enterprise Value (EV) Multiples:
1) EV/EBITDA – Most commonly used multiple for comparing profitability across companies and transactions.
2) EV/EBIT – Similar to EV/EBITDA but accounts for depreciation and amortization differences, more accurately for capital-intensive businesses
3) EV/Revenue – Used when profitability varies widely (e.g., early-stage or high-growth companies).
Equity Value (Market Cap) Multiples:
1) P/E (Price-to-Earnings) – Most commonly used in public market analysis.
2) P/B (Price-to-Book) – Relevant for asset-heavy industries like banks and insurance.
3) P/S (Price-to-Sales) – Useful when earnings are volatile or negative.
Industry-Specific Multiples:
1) Tech & SaaS: EV/Revenue, EV/Gross Profit, EV/ARR (Annual Recurring Revenue)
2) Financials: P/B, P/TBV (Price to Tangible Book Value)
3) Energy & Natural Resources: EV/BOE (Barrel of Oil Equivalent), EV/Reserves
4) Real Estate: P/FFO (Price-to-Funds From Operations), Cap Rate (NOI/Price)
5) Retail & Consumer: EV/EBITDAR (accounts for rent costs in retail businesses)
What are some issues with EBITDA and EBITDA multiples?
1) EBITDA hides the amount of debt principal and interest a company is paying each year, which can make the cash flow of a firm negative
2) EBITDA also hides the capital expenditure of the company (even through Depreciation & Amortization it hides partial capital expenditure expenses)
3) EBITDA also hides working capital requirements (Accounts Payable, Receivable, Inventory) which can be very large at some firms and represent large portions of cash flow
4) EBITDA also may not represent some cash charges that occur in certain years, such as litigation issues, impairments, etc.
How to derive Free Cash Flow (FCF) from EBITDA?
FCF = Net Income + Non-Cash Expenses – ΔNWC – CapEx
Non-cash charges - D&A, Stock-based compensation, impairment charges
Unlevered Free Cash Flow (UFCF) → Used in DCF Analysis
- UFCF = EBIT * (1 - t) + Non-Cash charges −CapEx−ΔNWC
- NOPAT = EBITDA - D&A - Tax
- UFCF = NOPAT + Non-Cash charges − CapEx − ΔNWC
- UFCF is before interest payments, used in enterprise valuation
Levered Free Cash Flow (LFCF)
- LFCF = (EBIT - Net Interests Expenses)*(1-t) + Non-cash charges - CapEx – ΔNWC - Mandatory Debt Repayment
- LFCF = Net Income + Non-Cash charges - CapEx – ΔNWC - Mandatory Debt Repayment
- Mandatory Debt Repayment is all amount owed to debtors
- LFCF represents cash available to equity holders after debt payments.
What are the differences between FCF, UFCF and LFCF? Do they have any relationship?
Free Cash Flow (FCF) measures how much cash the company generated, it is a broad term that refers to the cash available after necessary business expenses. It can be unlevered (before debt payments) or levered (after debt payments).
What is the difference between P/E, EBIT, EBITDA multiples?
P/E is not Capital Structure neutral, it takes into account the debt obligations components. Thus you use this for financial service firms where interest is critical to understanding the operations of a firm and where capital structures tend to be similar, due to regulation.
TEV/EBIT - includes D&A expenses so you are likely to use this when D&A is large and plays a substantial role into the firm’s operations (where fixed assets are important).
TEV/EBITDA - does not include D&A expenses so you use this when you don’t ultimately care as much about Capital Expenditures and want to compare companies on other bases
