Company Valuation Masterclass

Before we get started, I want to outline to you the structure and content of the course. This will provide you with a framework with which to understand how and why the topics of the course are presented to you in the way that they are. This will also help with your understanding of this complex topic so what ever you do, do not skip this lecture

The PDFs and Work Materials for this course can all be downloaded from the Company Valuation Dropbox folder, the link to which is attached to this lecture.

Course Projects and Models

This comprehensive course has a number of course activities and models (provided for you to conduct your own analysis) which are explained below.  All the course materials described below are available to download from the appropriate lectures.

Company Valuation Course Model

This model can be used to input your own comparative company data to calculate a value range for your target company.

Precedent Transactions Model

This model can be used to arrive at a target company valuation for your target company using your universe of appropriate precedent transactions

DCF and EVA Check Calculation

Use this model to quickly check your DCF and EVA valuations

WACC Exercise

This exercise encourages you to use the data in the spreadsheet to calculate the WACC for a fictitious company. The exercise steps are described in the video.

Basic Discounted Cash Flow Model Example

Here we explain how a simple Discounted Cash Flow model works and provide a sample spreadsheet with which you can do your own calculations. The workings of the model are explained in the video.

DCF Model Exercise

This exercise provides you with inputs to the model (DCF Model Exercise Inputs.xls) which you can apply to the DCF Model template which is available to download (Basic Discounted Cash Flow Model Exercise.xls). The answers to the exercise are provided in the answers spreadsheet (Basic Discounted Cash Flow Model Answers.xls). The exercise is explained step by step in the video.

Cash Flow Valuation 3 Measures Model

This model enables you to calculate three different types of cash flow from the model input area - all of which is explained in the video. The cash flow variants are:

• Capital Cash Flow

• Equity Cash Flow

• Free Cash Flow

Cash Flow Valuation 3 Measures Model - Exercise Results

This is an exercise using the model from Video 77. We change the inputs in the model to those suggested in this video to calculate a new set of cash flows. The results are provided in the results spreadsheet (Cash Flow Valuation 3 Measures Model - Exercise Results.xls)

Ability To Pay Analysis

The financial model with this video enables you to calculate your own Ability To Pay analysis. The steps are explained in the model. The spreadsheet, 83 Ability To Pay Analysis.xls, contains the model.

Margin of Safety Calculator

This simple model enables you to calculate the Margin of Safety for any publicly listed stock. Using Apple Inc. as an example, the video shows you how to input the data to the model, 94 Margin of Safety Calculator.xls, provided with this lecture.

Score Card Startup Valuation

Here we have the opportunity to evaluate a Startup using a combination of the Startup Valuation Scorecard. A Valuation Worksheet and a Scorecard model are provided to help you with the methodology explained in the video.

eCommerce Valuation Simple Model

This valuation approach enables us to value an early stage e-commerce business. A spreadsheet, 106 eCommerce Valuation Simple Model.xls, is provided to enable you to carry out your own valuation following the method described in the lecture.

Football Field Vertical Graph Model

We provide a simple model which will enable to create your own Football Field Vertical Graph model as shown in the lecture.

Football Field Valuation Graph

This lecture explains how to create the Football Field Valuation Graph shown and provides you with a model with an input area which you can use for your own graphs.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section

We start by taking a look at Company Valuation and the main message of this lecture is that Company Valuation is not a specific number but a process with a wide variety of different solutions.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section

Understanding the answer to this question is critical to any valuation course. We have to understand what we mean by valuation and understand that there is no definitive answer to this question and we discuss this in this lecture. We also identify the two main approaches to valuation and some of the modelling techniques each uses.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

What is the difference between Relative and Intrinsic Valuation?

This lecture explains why Price and Cost are not substitutes for Value. It is too easy to use market price or balance sheet cost as a proxy for value but this is a false premise. As an analyst preparing valuations you need to be able to explain the differences between these three concepts and to ensure that this is reflected in your approach to valuation.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

The context of a valuation process is as important as the valuation itself.  You cannot disconnect a business from its environment or the transaction that it is involved in and we explain how this helps us to understand why valuations are needed but also to be aware that the answer may be influenced or prejudiced by the factors discussed in this lecture.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

This is a simple six step process which you can adopt to screen your own potential investments in the style and approach of Warren Buffett. Note, his process is much more complex and this exercise, while serious, is simplified to make it quicker to carry out. Note that if you start building DCF models and calculating the WACC, the process will become much more time consuming. Its entirely up to you.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

As we have already established value is a subjective concept. This lecture explains six key principles which can impact value and valuation exercises. Its important for analysts constructing valuation models to ensure these are understood and reflected in the model's input assumptions.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

It is important to understand what is meant by Absolute or Intrinsic Valuation - which we explain in this lecture. We also explain that while the term suggests certainty, this is far from the case as we demonstrate that this approach to valuation is highly subjective and dependent on the assumptions made in the forecasting of the cash flows and the calculation of the discount rate and terminal value.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Intrinsic valuation helps us to answer an important question. Is the business or asset fairly valued in the market. This is important to our perspective and our investment return. Understanding what is meant by "Fair Value" is therefore an important concept in the world of valuation

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Relative Value is a method of establishing a value for an asset or a business by comparison to a similar or a group of similar business or assets. It comprises a group of methods which are useful for the analyst when working on valuation and we shall explore these further in the course.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Market value is a method of using the market to establish the value of a business or an asset. As we shall see Price does not always equal market value and certain criteria have to exist for an asset to be valued fairly by the market. We also place Market Value in the context of the two other broad approaches to valuation - Assets and Income, all of which will be discussed in this course.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Here we are looking not only as Cost Valuation but also related asset based valuation approaches. These are seldom used in Corporate Finance but we do need to be aware of them and their limitations

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

This measure of relative under value or relative over value is a useful tool in the cost valuation playbook. In the lecture I explain its application and why you should be careful how you use it.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

This approach uses the Balance Sheet values of the assets in the company and systematically modifies them to market value - very often downwards. We also take a look at the worst case scenario - Liquidation valuation.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

In this case study we take a look at the Book Value per Share for Apple and compare it to the market capitalisation. This gives us a perspective on the historic cost of the assets in the company compared to how the market is valuing the company. This is not a simple as it suggests and I out line the issues and drawbacks with the method in the lecture.

The Slide Deck used in the lecture is available to down load.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Ratio Analysis is a technique for measuring the performance of companies and making performance comparisons. We can however adopt this approach to enable us to create ratios which we can use in comparative valuation approaches, which we will cover later in this course. This lecture explains the five types of Financial Ratios used in Financial Analysis and then shows how we can extract information from financial statements to create ratios which are relevant to valuation

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Here we explain the difference between Equity valuations (market capitalisation or share price driven) and Enterprise valuation which takes into account the net debt in the business and therefore adjust the valuation for the capital structure of the business. This is a critical difference which you need to understand.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

This metric is useful for valuing high growth or early stage businesses, particularly when they have low or negative profits. It also has its place in comparable valuation exercises as I explain in this lecture.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

These are two of the most frequently used valuation metrics so its important to understand what they tell you and the differences between them.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

This is a useful high level valuation ratio particularly for understanding the valuation of high growth early stage businesses as I explain in this lecture. While it is an excellent metric for equity investors you also need to understand its limitations and should generally only use it in conjunction with other ratios.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

These two ratios help us to understand how the market is valuing the earnings of a company, with the latter, the PEG ratio, adjusting this for different levels of growth. These are two excellent and frequently used valuation ratios but you need to understand what they tell you and how and when to use them, and when not to use them.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

This ratio is a measure of the valuation of a company compared to its Balance Sheet Net Assets. As I explain in this lecture there is a role for this metric but only in limited circumstances and I would be cautious about using this metric more frequently than I indicate here.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

This metric appears to be a step forward from using earnings and it too has its place. However you need to ensure that you understand the financial characteristics of the business you are valuing as it is not suitable for every company as I explain. We are going to take a detailed look at definitions of cash flow in the next lecture to make this clearer.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

In a sense in this section I have left the best lecture until last. Understanding cash flow is one of the keys to properly preparing valuations. Its important that you thoroughly understand what these metrics mean and how to find them in the Income Statement and in the Cash Flow Statement. This is particularly true of the FCFF (explained within) which is the "cash flow" you need when preparing a DCF valuation

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

This case study shows you how easy it is to access up to date financial information and key ratios for public companies through the internet. I show you the Apple Inc. Page in Yahoo Finance and provide a link to the page in the slide deck and in the resources section of this lecture.

https://finance.yahoo.com/quote/AAPL/key-statistics?p=AAPL

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

In this lecture we introduce Comparable Companies valuation and explain its benefits and drawbacks. This approach is used frequently by analysts and investors and its important to have a detailed grasp of how to implement this method of valuing companies.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

This lecture explains the simple five steps to creating a Comparable Companies model and explains some of the pitfalls you need to avoid. We are going to actually do this when we come to creating our own Comps model later in this section.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Which of the answers below is NOT one of the Five Steps to compile a Comps Model?

This is a critical step in the Comparable Companies Valuation process so we spend a little time in this lecture discussing how to assemble an appropriate group of companies. This is the foundation of your valuation so you have to do this with care.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Now we are ready to create our comparable companies model and I take you through this step by step as well as provide you with a model you can use for your own valuation purposes.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Experienced sector specialist have been known to use "Rule of Thumb" valuations as a short hand way of coming up with a company valuation. As I show here is this both dangerous and unscientific. I raise this flag to make you aware of this approach, but not to encourage you to adopt it.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

This is another relative valuation methodology which relies on historic M&A transactions to derive a valuation for your target company. We explain how this works, how it compares to Comparable Companies Analysis and some of its drawbacks. For all that, it is important and forms one of the three main valuation methods used by professionals, principles and investors to value companies.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

In this lecture we address the issue not only of the financial information but the deal information you need to collect for the analysis. We also explain the key ratios and why they are useful individually and collectively.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

We have already seen that Precedent Transaction include a takeover premium which needs to be understood when computing ratios to be used in company valuation. We explain what Premiums Paid analysis entails and what it tells us about valuation. Its a useful technique and you should include it when it adds to your understanding of the valuation you calculate using Precedent Transactions analysis.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Compiling the information for Precedent Transaction analysis can be time consuming and tedious. Don't worry you have plenty of company! I suggest some free and paid resources for finding the data you need. Just be prepared to roll you sleeves up and do some work on this. It will be worthwhile in the end.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

I have provided you with an Excel Model from one of my own models which you can adapt for your own valuation projects. In this lecture I walk you through the elements of the model so that you understand what you have to input and how the model works.

The Precedent Transaction Model is available to download with this lecture.

A PDF of the Slide Deck to this lecture is available to download from the Resources Section.

Market Value Added uses the Market Capitalisation of the company, when compared to the book value of equity, to calculate how much "value" has been created by the company compared to its book value - the original capital contributed to establish the firm.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

In this lecture we explain Economic Value Added which is another measure of valuation and calculates whether or not a business exceeds the hurdle rate of return for investors. This measure was devised by Stern Stewart & Co in the 1980s. This is another very useful valuation method and assesses whether a firm's operating profit has exceeded a hurdle rate to create economic value.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

We can use EVA to act as check for our DCF valuation and this lecture explains how to do this. I have included a copy of the Spreadsheet used in the lecture so that you can work on this yourself.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

A Discounted Cash Flow Valuation is a valuation method with which we arrive at the value of a company, an asset or an investment today by calculating the value of all future cash flows from the asset.  In this lecture we explain the basis of the methodology before we take a deeper look into the method in this section.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

This lecture explains what we mean by present value and shows you the simple formula for its calculation. We also take a look at how you can calculate Future Value and some of the advantages and limitations to using Present Value calculations in your modelling.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

The Discounted Cash Flow Formula can be very difficult to understand if you are not familiar with complicated financial formulas and how they work. This does not matter. With the DCF Formula what is important is to understand what the formula actually does which is what we explain in this lecture. Once you understand this not only can you take the first step towards creating a DCF model, you can be confident in using the NPV function in Excel as you will understand how to correctly set up the inputs to this Excel function.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

As you will see in the discussion in this lecture, there are both Pros and Cons to the DCF valuation method. You need to be aware of these and understand the impact they can have on the valuation. Forewarned is forearmed.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

What do we mean by Free Cash Flow?

It is important that you select the correct cash flow line in the cash flow statement for your valuation exercise and this lecture explains some definitions of cash flow and which line to use.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

This lecture explains the importance of cash flow to a business and why this is a more critical component than just profit. Cash flow is used in a variety of analytical ratios, some of which are explained here to give you a deeper insight into the role played by cash flow in a business.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

When creating your DCF Model you need to consider your input assumptions very carefully. These have to be an accurate reflection of historic performance combined with object assessments of future performance, including improvements and costs savings. We consider the range of factors affecting the cash flow in this lecture and discuss the approach you should take.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

Once you understand the drivers of business valuation, you can take and create strategies which management can implement to improve cash flow and correspondingly the value of the business. We discuss these strategies and the simple framework you can adopt to achieve this in this lecture. This ability to learn from your modelling and directly impact management decisions is one of the valuable benefits of creating a DCF model.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

Choosing the correct line from your Cash Flow Statement to use in your Discounted Cash Flow Model is such a critical issue that I have created this lecture to explain the definition of Unlevered Cash Flow line by line.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

This section takes an unashamedly qualitative approach to business valuation. The aim to to build up an understanding of how the business creates value for its customers and its shareholders. This understanding of value creation underpins the valuation of the business and we can use the insights we gain to formulate better input assumptions for our DCF model as well as improving our fundamental understanding of the business itself.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.

This model enables us to examine the external factors impacting a firm. These will affect the business operations and therefore will also impact the firm's valuation. Your challenge is to evaluate these factors and bring your conclusions into your model input assumptions.

A Model Template is available for you to download and use to work through the model factors.

A PDF of the Slide Deck is available to download from the Resources Section of this lecture.