Value Creation What Drives Your Company
Writer: Nikolay Savov
Date: 10/7/2014
Business English 312
Value Creation: The Six DCF Pointers
When trying to decide the value of a particular company, let’s say Apple for example, it is crucial to understand what determines its investing value. Valuing a huge corporation is not simply taking a look at the balance sheet and income statement and figuring out what’s total assets and total liabilities. A discounted cash flow analysis is one of the main ways investors can value a company. The idea of the actual valuation is to project future cash flows and discount them to see what would be their present value 10 years from now, for example. These cash flows then affect the stock price which an investor would compare to the current stock price to see if the company is undervalued or overvalued. In an undervalued company, an active investor would usually invest money because he or she thinks the company is worth less that what it should actually be and vice versa with overvalued companies. The standard understanding is that, in the immediate future, a company would hopefully approach its stable growth rate at which it would be moving with the market or the sector that it is in, thus, growing at a constant stable rate indefinitely. The main drivers of a DCF analysis are Revenue Growth Rate, Operating Profit Margin, Cash Tax Rate, Incremental Fixed Costs, Operating Working Capital and Working Average Cost of Capital,
Although a standard measure, revenue growth rate is an important pointer of how you think a company is going to perform in the future. High growth rate is usually why an investor would be attracted to buying stock in the company. At this point you might be wondering how one can estimate the growth rate? One place to look is the earnings report and the MD&A section of the 10-k and look to see if management has any plans for expansion or if it has any new product that has a competitive advantage. Estimating growth rate is more of an art rather than a rock
Date: 10/7/2014
Business English 312
Value Creation: The Six DCF Pointers
When trying to decide the value of a particular company, let’s say Apple for example, it is crucial to understand what determines its investing value. Valuing a huge corporation is not simply taking a look at the balance sheet and income statement and figuring out what’s total assets and total liabilities. A discounted cash flow analysis is one of the main ways investors can value a company. The idea of the actual valuation is to project future cash flows and discount them to see what would be their present value 10 years from now, for example. These cash flows then affect the stock price which an investor would compare to the current stock price to see if the company is undervalued or overvalued. In an undervalued company, an active investor would usually invest money because he or she thinks the company is worth less that what it should actually be and vice versa with overvalued companies. The standard understanding is that, in the immediate future, a company would hopefully approach its stable growth rate at which it would be moving with the market or the sector that it is in, thus, growing at a constant stable rate indefinitely. The main drivers of a DCF analysis are Revenue Growth Rate, Operating Profit Margin, Cash Tax Rate, Incremental Fixed Costs, Operating Working Capital and Working Average Cost of Capital,
Although a standard measure, revenue growth rate is an important pointer of how you think a company is going to perform in the future. High growth rate is usually why an investor would be attracted to buying stock in the company. At this point you might be wondering how one can estimate the growth rate? One place to look is the earnings report and the MD&A section of the 10-k and look to see if management has any plans for expansion or if it has any new product that has a competitive advantage. Estimating growth rate is more of an art rather than a rock