How to go about valuing a company?

How to go about valuing a company?

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1. Understanding the Business

     a. Industry Analysis
     b. Competitive Analysis

     Note : Frame works are just there to help you organize your thoughts. The industry
     and competitive analysis should help you understand what the major challenges and
     opportunities the company is facing in its industry /operating environment .

     c.  Analysis of Financial Statements
     d.  Company disclosure analysis ( e.g. press releases, earnings call )

     At the end of this analysis you should understand the company’s business model.
     A business model is how a company makes its money. The customers it targets,
     the products or/and services it provides, and how it gets these products and services
     to its customers ( supply chain ).

2. Forecasting Company Performance

     a . Forecast sales, earnings, dividends
     b.  Pro Forma Analysis

     Overall company forecasting can be done two ways, top down forecasting or
     bottom up forecasting. Top down forecasting is when you forecast using
     economic factors ( GDB growth), industry ( overall average industry sales number ) ,
     and then specific company forecast. Bottom up forecasting is when you forecast
     based on some factor of the company , for example in retail you might calculate
     individual store sales and aggregate that up to total company sales numbers.

3. Selecting the appropriate valuation model

     a. Pick one based on the characteristic of the company and the
        context of valuation
     b. Some type of valuation models available :

          i.  Discounted Cash Flow model – Value of stock is the present
             value of t expected future cash flows
         ii. The methods of multiples

     c. Three things that needs to be considered in choosing a model

          i.  Model must match the characteristics of a company – For
              example you would choose the discounted cash flow model
              for companies that produce steady predictable cash flows
          ii. Choose a model based on data available
          iii. Pick a model based on the purpose of valuation

4. Converting forecast to a valuation

     a. Tweak output from valuation model using judgment
     b. Perform Sensitivity and Situational Analysis on the model to
         create a stronger valuation.

5. Applying the valuation conclusions

     a. The results from the valuation models can be used for many
        different purposes such as investing in a company, evaluating if
        the current market price of a company is overvalued/undervalued,
        and evaluating if the future strategic direction of a company is
        good or bad.

– From Reading 34 of Equity – CFA Program Curriculum, Volume 4 –

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