We routinely common-size the income statement and balance sheet, showing components as percentages of revenue or assets, to give us insight into margin trends, liquidity, leverage, and so forth. I also common-size the cash flow statement, using net income as the basis (100%). This tells me which components are the most sensitive and volatile on [...]
If you own shares in a mutual fund, you can get your money out in a few days. This is because the fund will redeem your shares on request, and has cash, liquid investments, and credit lines to guarantee its ability to do so. You have full liquidity.
If you own an interest in a private [...]
Most of my valuations involve equity ownership interests, whether they are operating businesses or holding entities like FLP’s. I develop cash flow to equity using normal procedure, apply a discount or capitalization rate, applicable valuation discounts, and that is that. If it is an operating business, I use the Income Approach and prepare a multi-year [...]
No heavy theory or valuation controversy today: this is a meat-and-potatoes post about how to both save time and eliminate errors in the quantitative (spreadsheet) parts of your reports. It boils down to two rules:
Unique inputs should only be entered once in a spreadsheet.
Never enter a value that can be calculated by a formula.
A unique [...]
When I sit down to write a report, I ask myself:
Who will probably read it?
Who will be the most important reader (the one I have to persuade)?
How knowledgeable are they about business valuation?
The answers to these questions shape two aspects of my writing:
1. How much background I will include (e.g., about the company)
2. How detailed my [...]
I just finished another book I’d recommend, The Myth of the Rational Market by Justin Fox. It’s a superb history of economic and financial theory over the last two hundred and fifty or so years, and gives appraisers a deeper understanding of how we got to where we are (wherever that is) and where we [...]
The stock market crash has reduced the confidence of our estimates of the cost of equity capital. Historical build-ups using Ibbotson or Duff & Phelps data show lower 2008 risk-free rates and equity premiums than in 2007. But uncertainty is higher, so the cost of equity capital has to be higher. (Seen an IPO lately?) [...]
In a recent post I wrote that buy-a-job businesses do not offer return on equity. What I should have said was that buy-a-job businesses do not offer inherent appreciation in their value; i.e. the value of their operating assets is not expected to change.
If you buy such a business for $200,000, financed half with your [...]
For purposes of this post, please ignore small buy-a-job businesses and large ones that can be valued using public comparables. I am thinking about the typical business I, and most of us, usually value, a private operating company with sales of a few million dollars.
Who knows what is going to happen macroeconomically: for example, will [...]
