VALUATION MEASURING AND MANAGING THE VALUE OF COMPANIES

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VALUATIONMEASURING AND MANAGING THE VALUE OF
COMPANIES
FORECASTING PERFORMANCE
PREPARED BY DAVID DAI
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Determine Length and Detail of the Forecast

• All continuing value approaches are based on an
  assumption of steady state performance.
• Constant Rate of Return on all new capital
  invested during the continuing value period
• The company earn a constant return on its base
  level of invested capital
• The company grows at a constant rate and
  reinvests a constant proportion of its operating
  profits in the business each year.

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- Continued

• Recommend using a forecast period of 10 to 15
  years
• A detailed forecast for 3 to 5 years.
• In addition to simplifying the forecast, this
  approach also forces you to focus on the
  long-term economics of the business, not just the
  individual line items of the forecast.

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Develop Strategic Perspective

• - Means crafting a plausible story about the
  companys future performance.
• What ultimately drives the value of the company
  is the assessment of whether and for how long a
  company can earn returns in excess of its
  opportunity cost of capital.
• superior value to customer through a combination
  of price and product
• Achieve lower costs than competitors
• Using capital more productively than competitors.

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Industry Structure Analysis

• Five Force Model

• Suppliers

- Substitute products
- Buyers

• Entry of new competitors

• Entry of existing competitors

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Customer Segmentation Analysis
External Shock
Structure
Conduct
Performance
Feedback

• Macroeconomics
• Technology
• Regulation
• Customer Preference/Demographics

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Competitive Business System Analysis
Product design and development
Procurement
Manufacturing
Marketing
Sales and Distribution
Product attributes quality Time to market
Technology
Pricing Advertising Promotion Packaging Brands
Access to Sources cost Outsourcing
Sales Effective Costs Channels
Costs Cycle Time Quality
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Translate the Strategic Perspective into
Financial Forecast

• Build the revenue forecast
• Forecast operational items, such as operating
  cost.
• Project non-operating items.
• Project the equity accounts.
• Use the cash and/or debt accounts to balance the
  cash flows and balance sheet.
• Calculate the ROIC tree and key ratios to pull
  the elements together and check for consistency.

Such as operating cost, working capital,
property, Plant, and equipment, by linking them
to revenues or volume
Equity should equal last years equity plus net
income And new share issues less dividends and
share repurchases.
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Inflation

• Expected inflation
• (1Nominal rate)/(1 Real rate) - 1

Forecast and cost of capital could be estimated
in nominal rather than real currency uits. For
consistency, both the financial forecast and the
cost of capital must be based on the same
expected general inflation rate. This means
inflation rate built into the forecast must be
derived from an inflation rate implicit in the
cost cost of capital.
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Develop Performance Scenarios
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Once the scenarios are developed, an overall
value of the Company can be estimated. This will
involve a weighted Average of the values of the
independent scenarios, Assigning probabilities
to each scenario.
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Checking for Consistency and Alignment

• Is performance on the value drivers consistent
  with the companys economics and the industry
  competitive dynamics?
• Is revenue growth consistent with industry
  growth?
• Is the return on capital consistent with the
  industrys competitive structure?
• How will technology changes affect returns? Will
  they affect risk?
• Can the company manage all the investment it is
  undertaking?

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Some Data to Guide your forecast

• Companies rarely outperform their peers for long
  periods of time.
• Company performance varies from industry
  averages.
• Industry average ROICs and growth rate are linked
  to economic fundamentals.

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CASE STUDY