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FINANCIAL CHRONICLE™ » CHRONICLE™ ANALYTICS » The Basics of Valuing Companies

The Basics of Valuing Companies

+18
jehovah
Mubin Mustafa
EquityChamp
SLBOY
Bullrunner7
nnk
zoozzoo
KDDND
yellow knife
suny j
trasantha
LateTackle
rmark
ISURU
bakapandithaya
Light of Hope
amilaela
sriranga
22 posters

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1The Basics of Valuing Companies Empty The Basics of Valuing Companies Wed Sep 14, 2011 3:31 pm

sriranga

sriranga
Co-Admin

Valuation is at the heart of all investment decisions.
Every time you choose to buy or sell a share you take a view on what the share is worth, and whether the market's valuation is high, low, or about right.

First we will  run through the basic methods, and then have a look at how they can be applied in practice on companies in various sectors.
Valuation methods tend to focus on numbers, but they need to be considered in the context of the company's prospects, and the risks in its business.
Two Main Approaches
There are two main approaches:
Relative valuation –how does the company's share price compare with other companies in the same sector, or the market as a whole?
Future income - by forecasting the future profits, cash flow, dividends or other economic factors of the company.
How Much Time Have You Got?
If investing is your day job, then you have the time to build comprehensive financial models and make sensible forecasts from which discounted cash flow valuations can be derived. That is what a stockbroker's analyst, covering a handful of companies all in the same sector, will do.
But the amount of time and effort required to use DCF and other forecasting methods means that they are not very often practical tools for the individual investor.
The Relative Valuation Approach
So I am a fan of the relative valuation approach -- and not just for basic share valuation metrics such as P/E ratio and dividend yield. It is very instructive, when researching a company, to look at one or more other companies in the same sector. Apart from the numbers, the most useful things to compare include:
• Business mix and geographical coverage;
• The business model and strategy; and
• What the management says about trading conditions and prospects.
If you only look at one comparative company, choose a large, well-researched one which makes some effort, in its accounts and/or on its website, to explain its strategy and the important trends and developments in its industry.
Consensus Forecasts
There is one important area in which private investors can benefit from the analysts' financial models. Consensus forecasts of revenues, earnings and dividends are widely available for most stocks. These are averages of the forecasts of all the analysts covering a stock, and as companies give "guidance" about their prospects, forecasts for the next year end are based on more than just idle speculation.
So where possible I would usually use the prospective P/E ratio and dividend yield (based on the forecast for earnings and dividend for the next year end) in comparing companies.

Approach
Putting all this together, my approach is:
1. Choose one or more comparator companies.
2. Learn about the sector, and how the business and strategy of the company compares with others in the sector. From this you can form a view as to the prospects and downside risks for the company.
3. Compare the basic valuation measures: prospective (or historic) PE, dividend yield, PEG ratio etc. This is a good time to look at analysts' recommendations.
4. If the basic valuation measures do not make sense, then look at other valuation measures such as price/sales or price/book value.
5. Look at how the share price has performed over the past twelve months (or longer).
6. Examine and compare the operating performance: revenues, margins, return on capital etc.
7. Examine and compare the financial strength: gearing, dividend cover, cash flow, tangible assets etc.
8. Look for any hidden liabilities or value, e.g. pension fund deficits, over- or under-valued properties.

A Comparison Table
Drawing up a table such as the one attached below is a quick and easy process which helps focus attention on what may be driving the market's valuation of a share.
All of the numbers can be taken from CSE Company Financial Info or Bloomberg of this website, with just a little bit of arithmetic required for the revenue growth and cash flow ratios.

Valuable comments are appreciated
Edited article from Investing Stratergy
Attachments
The Basics of Valuing Companies AttachmentComparison Table.xlsx
You don't have permission to download attachments.
(10 Kb) Downloaded 115 times

http://sharemarket-srilanka.blogspot.co.uk/

2The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Sat Oct 22, 2011 9:45 pm

amilaela

amilaela
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

ela

https://www.facebook.com/profile.php?id=100001851586843

3The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Sun Jan 01, 2012 5:11 pm

Light of Hope


Vice President - Equity Analytics
Vice President - Equity Analytics

just read this. looks valuable info, thanks

4The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Sun Jan 01, 2012 5:13 pm

bakapandithaya

bakapandithaya
Vice President - Equity Analytics
Vice President - Equity Analytics

Thnkx sri 4 sharing

5The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Sun Jan 01, 2012 9:16 pm

ISURU

ISURU
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Good one! thanks

6The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Sat Mar 10, 2012 11:37 am

rmark

rmark
Manager - Equity Analytics
Manager - Equity Analytics

Sriranga, valuable information, thank you for sharing.

7The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Sat Mar 10, 2012 1:13 pm

LateTackle

LateTackle
Senior Equity Analytic
Senior Equity Analytic

Very useful. Thanks for sharing

8The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Sat Mar 10, 2012 1:17 pm

trasantha


Senior Equity Analytic
Senior Equity Analytic

Tks Smile

9The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Sat Mar 10, 2012 3:08 pm

suny j


Stock Trader

Thanks vary good one ...as allways I appriciate your articles ....

10The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Mon Mar 12, 2012 9:21 am

yellow knife


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Thanx

11The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Sun May 05, 2013 6:13 pm

KDDND

KDDND
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Thx Sri! reading this gives more knowledge!
Bit of home work to do! Smile

12The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Fri Nov 28, 2014 1:26 pm

zoozzoo


Manager - Equity Analytics
Manager - Equity Analytics

valuable post...

13The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Fri Nov 28, 2014 8:33 pm

nnk


Equity Analytic
Equity Analytic

Thanks for the post. Can some one tell me why I can not download this. Sad

14The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Fri Aug 26, 2016 1:39 pm

Bullrunner7

Bullrunner7
Manager - Equity Analytics
Manager - Equity Analytics

Good read !

15The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Fri Aug 26, 2016 2:09 pm

SLBOY


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

nnk wrote:Thanks for the post. Can some one tell me why I can not download this. Sad

 Same Here  Sad

16The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Tue Aug 30, 2016 12:01 am

EquityChamp

EquityChamp
Moderator
Moderator

Forum require more of these coz of growing number of learners.

17The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Tue Aug 30, 2016 12:02 am

Bullrunner7

Bullrunner7
Manager - Equity Analytics
Manager - Equity Analytics

Yes I agree !

18The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Tue Aug 30, 2016 12:03 am

EquityChamp

EquityChamp
Moderator
Moderator

Ha Boy............. How are you doing.

19The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Tue Aug 30, 2016 12:04 am

Bullrunner7

Bullrunner7
Manager - Equity Analytics
Manager - Equity Analytics

I'm doing good ! 
How are you EC ?

20The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Tue Aug 30, 2016 12:09 am

EquityChamp

EquityChamp
Moderator
Moderator

Living good same as ever before. need to be with the forum as well but time is the issue for me.
Isn't it a good idea to study about a stock of your liking and let us know what do you think. Trust I have taught boys like you how to look at a stock to identify future winners..

21The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Tue Aug 30, 2016 12:16 am

Mubin Mustafa


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

good article

22The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Tue Aug 30, 2016 12:17 am

Bullrunner7

Bullrunner7
Manager - Equity Analytics
Manager - Equity Analytics

That's good to hear !
Yeah Time is real hard to mange nowadays but I trust you'll work everything out !
I've been thinking about talking about a stock I like Although I'm currently interested in the banking side of CSE, I'll come through with something to talk about in the near future !

23The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Mon Dec 05, 2016 10:00 pm

jehovah

jehovah
Equity Analytic
Equity Analytic

thanks...... lol!

24The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Tue Dec 06, 2016 12:40 am

ayesh84

ayesh84
Stock Analytic
Stock Analytic

Golden! Thank you very much for the knowledge sharing posts!

25The Basics of Valuing Companies Empty Re: The Basics of Valuing Companies Fri Jun 28, 2019 11:29 am

mehdi20


Stock Trader

thanks

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