Valuation Fundamentals

Valuation Fundamentals
Table of Contents
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Table of Contents
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Introduction
Concept of Fair Value
Who uses Valuation?
Valuation & Wealth Maximization
Valuation Approaches
Valuation Methods
Is there a Best method?
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Which method is best suited ?

Public vs Private Company
By Scenario
By Sector
Valuation FAQs
General
DCF
Comparables
Press Alt, W, F for maximizing viewing area
Equity Valuation Fundamentals

Introduction Concept of Fair Value
At Finatics, we define Equity Valuation as

A process that involves determining Fair Value of a companys equity in order to assist buy/sell decisions for the
purpose of Financial or Strategic Investment
So what is Fair Value of an

investment?
How should the worth of an

Investment be determined ?
(Contd)
Put Simply, Fair Value is the price at

which, one will get the desired rate of
return when the investment is sold to
a willing & able buyer.
The worth of an investment is
determined by whether it is meant for
long term use to generate returns
(i.e. Strategic Investment) or for
resale when the right price or fair
value is achieved (Financial
Investment). The purpose of Valuation
is to determine a fair value range of
an investment (or capital asset) using
one or more of several available
techniques
As discussed, investment related

demand will be driven by expected
return resulting from demand of
other similar opportunities available,
potential to generate cash and
implied risk.
When determining whether expected
return can be achieved, one way is to
estimate the cash generated from
the Asset against what is invested
after considering Time Value of
Money (a.k.a. Net Present Value)
the other way is to find out what

are other similar opportunities
available for, and then comparing the
extra price paid for or money saved
by the Asset.
Another approach one may use is
determining the cost of a substitute
a.k.a. replacement cost! Valuation
deals with understanding & applying
these 3 approaches in varying
situations

Introduction Who uses Valuation?
Valuation is used at two levels

Primary, which deals with Value Creation at a Corporate Finance level
Secondary, that deals with market intermediaries & investors
Buy Side Institutions
Sell Side Institutions
Corporate Finance
Buy Side refers to those institutions

that are engaged in buying research
conducted by others. They
invest/manage clients funds (as well
as their own) into investments in
primary or secondary markets.
Primary refers to direct investment in
companies while secondary involves
buying/selling stocks in the stock
market.
E.g. Mutual Funds, Hedge Funds,
Private Equity Firms & Venture
Capitalists (any Asset Management
Company).
Sell side are involved with

recommending buy/sell decisions to
clients. The buyers of such reports
may be Retail clients, High Net-worth
Individuals or Institutional investors.
E.g. Brokerage Houses, Research
Firms & focused KPOs
Note: Bulge bracket Investment
Banks play both buy/sell side roles.
Corporate Finance refers to managing

finances of a company and involves
selecting projects, creating budgets
& arranging funds. Their job is the
toughest one i.e. Creating Wealth in
the secondary market through
managing expectations and delivering
superior results. They use valuation
to understand gaps in expectation
and performance of the firm as a
whole and to take decisions at a
project level!

Wealth Maximization through Valuation
What is Wealth Maximization?

Strategies are made in the boardroom while their results are declared by the secondary market! Wealth Maximization
deals with making business decisions that create wealth1 for shareholders instead of just maximizing Profit/EPS
Step 1 - Understand
Expectations
Expectations are difficult to
capture as they are not only
affected by sentiments but
also fundamental performance
Step 2 - Quantify
expectations through
Valuation
Valuation is the process of
capturing expectations with
the most likely scenario in
terms of business performance
Note: Today, many companies believe that Value Creation for

customers & society is as relevant as maximizing shareholder
returns. However, these two goals may result in friction at
times leaving the shareholders to prioritize!
Step 3 - Adapt
expectations in
Business Decisions
Wealth
Maximization
through
Valuation driven
decision making
Business decisions must be

aligned to expectations so as to
maximize wealth. Managers
must ask themselves whether a
project will add wealth to the
firm as a whole
1 Wealth refers to
the total wealth created for shareholders through capital

appreciation + dividends a.k.a. Total Returns to Shareholder (TRS)

Valuation Approaches
Why not have just one approach?

The idea is to capture all dimensions that a investor may be concerned with. Unfortunately, no single valuation
methodology is complete and hence two or more approaches are necessary to arrive at a fair value range
Income based
Market based
Asset based
Income based approaches aim to discover

value of a firm through its income metrics
like Net profit or Free Cash Flows etc.
E.g. DCF Valuation, Edwards Bell Ohlson
(EBO) model etc.
Pros
Cuts through accounting variances &
earnings abnormalities while also
considering Macro level implications to
determine fair value of the firm
Considers Time value of Money
Most detailed & scientific
Provides intrinsic value
Used as a basis to determine whether
valuation is stretched
Cons
Fails to capture sentiment
Extremely data intensive
A forecast, by virtue, brings with it an
element of uncertainty
Market based approaches aim to capture

market sentiment while also taking into
account peer comparison.
E.g. Trading & Transaction Comparables
i.e. Relative Valuation
Pros
Captures market sentiment
Very quick & easy to apply
Works best between quarters
Results are very easy to explain/pitch
Cons
Does not work well for startups
Has a tendency to overvalue stocks in
bullish markets and undervalue in
bearish ones
Sways with the market as there is no
anchor or intrinsic value
Many believe that the approach is
responsible for bubbles
Asset based approaches aim to value a

firm by valuing its assets on a carry
value, replacement value or liquidation
value basis
E.g. Liquidation value approach,
Replacement cost method and Book Value
Pros
Works best for distressed & loss
making companies
Works best in the downturn
Gives worst case scenario value (i.e.
in a way intrinsic value)
May also be used for target screening
as first step in the M&A lifecycle
Cons
Severely undervalues profit making
companies by not capturing market
sentiment or business performance
Fails to capture market sentiment

Valuation Methods
Discounted Cash Flows
Trading Comparables
M&A Valuation
Other Methods
DCF Valuation aims to discover

the Intrinsic Value of a
company by estimating
present value of future cash
flows.
Sub Methods:
- Enterprise valuation (FCF/F)
- Equity method (FCFE)
- Economic Profit Model
- APV approach
Pros:
- Very scientific and detailed
- Normalizes accounting noise
- Provides intrinsic value
Cons:
- Sensitive to many factors
most of which are at the
discretion of the analyst.
- Does not work well between
quarters
- Fails to capture sentiment
a.k.a. Relative Valuation, aims

to determine valuation by peer
comparison and hence
captures market sentiment
Sub Methods:
- Equity & Enterprise
Multiples
Pros:
- Capture Market Sentiment
- Quick & Easy to apply
- Works between quarters
Cons:
- In the real world, there is no
such thing as a perfectly
comparable company
- Valuation is always biased as
there is no benchmark
valuation of the company in
question
- Bull markets lead to more
bullish valuation and vice-versa
Although not an entirely

different methodology it deals
with judging the feasibility of a
merger/acquisition using
slightly modified techniques
Methods Used
- Accretion/Dilution Analysis
(measures whether EPS
increases or decreases post
deal)
- Transaction Comparables
(scrutinizes historical
transactions for deal
premium paid on similar
acquisitions)
- LBO modeling (measures the
IRR available for equity
contributors post debt
repayment)
Other methods some of which

are academic in nature and
hence best left in books.
However, theory is the basis of
practice hence they deserve a
good read!
- First Chicago Approach
- Contingent Claim Valuation
- Edwards, Bell & Ohlson model
- Dividend Discount Model2
- Liquidation Value approach2
- Replacement Cost approach2
- Sum Of The Parts Valuation2
(SOTP ) a.k.a. Multi-business
Valuation
Best Suited For: The long

term. Acts as an anchor for
other methods
Best Suited For: Highly volatile

companies, cyclical companies.
Suited for the short term
Remark: These are the most

popular techniques used for
valuing M&As and hence there
is little choice available to
discuss pros/cons
Remark: Modern theory &

practice is a result of great
amount of invaluable
contributions made by several
academicians on the subject.
Some of these methods were
part of the evolution chain and
that was the only role they ever
played!
2 briefly discussed ahead

Is there a Best method?
Simply Put
Investment Horizon & Valuation
Investment Type & Valuation
No. There is no Best

method. Apart from the
pros/cons, each method
is designed to suit:
- an investment horizon
- an Investment type
- market conditions
- a specific sector3
- a specific scenario3
Investment Horizon i.e. Short Term or Long term

A short term (lets say less than one year) investor Is typically
interested in determining fair value between quarterly results.
Although DCF provides an intrinsic value, in the short run, share
prices may be very volatile and DCF will not help such an investor
in any way. Hence, Short term investors a.k.a. speculators must
rely on trends, sentiments and news to determine valuation.
These factors are best captured in the Comparables Method (i.e.
Relative Valuation).
The best way out
Market Conditions & Valuation
The best approach is what

many call the Valuation
Football Field a.k.a.
Triangulation. This
involves determining fair
value using all relevant
approaches followed by
drawing an inference in
terms of a fair value
range. This approach also
helps in using one method
to sanitize the other!
Bullish & Bearish Markets call for different valuation strategies

and hence different methodologies. In bullish markets, many shift
from DCF to Comparables in the pretext that DCF fails to
capture that the market as a whole has moved to a higher level.
However, they fail to recognize that without DCF, the valuation is
floating and is no longer tethered to an intrinsic value. The
opposite prevails in case of bearish markets, when analysts swear
by DCF, now claiming that Comparables understate valuation.
Bottom-line: It is at an inflection point, that the truth about such
theories is exposed. Secondly, one cannot predict inflection points
implying that, along with comparables an intrinsic value method
must always be used to see how far the tether can be stretched.
Investment type
i.e. Strategic or Financial
Financial investments are made in
the secondary market where one
relies on secondary data with the
idea of liquidating the investment at
some point in the horizon instead of
generating regular returns from the
capital itself. On the other hand,
Strategic investments are the ones
made as part of Corporate Finance
and hence data availability is not an
issue and the investor may go for
primary research when more data is
required. Needless to say, the funds
involved & research carried out is
more intense. E.g. Project Appraisal
Which method for which type?
For a Financial Investment one may
choose a Market / Income / Asset
based valuation approach.
However, in case of strategic
investments one must rely on an
Income based approach backed by an
asset valuation. 3 briefly discussed ahead

Which method is best suited: Public vs Private
Public Company Valuation
Private Company Valuation
Public Companies, by law, must provide audited financial results

on a regular basis to the public at large. That apart, they also
may make available a host of other investor friendly information
in the form of industry trends, presentations, analyst meets &
conference calls. Secondly, Public companies get far more
coverage in the form of analyst reports, news, management
guidance and interviews. All this makes the job of valuation an
easier one. With such data availability it is easier to use any of
the valuation techniques with a high degree of reliability. For such
companies, any of the valuation methodologies discussed earlier
may be used (also depending on the Scenario and sector)
It must be noted that , Private company valuation is driven by a

strategic purpose like Private Equity, Joint Ventures and M&As.
For such purposes, traditional financial investment driven
methodologies will fail. Simply because, strategic transactions
are motivated by a control factor i.e. the power/authority to
change business direction & strategies. This control commands a
premium over normal trading driven valuation approaches.
Hence, the Transaction Comparables approach (a.k.a. Precedent
Transaction Analysis or Deal Comps) is more popular & relevant
here. However, as for all scenarios, one must use other
approaches as well to determine a fair value range.
Which valuation method results in the highest Valuation?

Contrary to popular belief, the highest valuation is not driven by the method alone
but market conditions & the sector as well. In general, Transaction Comparables
include a control premium and hence result in a higher valuation than other methods.
Between DCF & Trading Comparables the results will vary depending on.
For E.g. When valuing a cement company, DCF is likely to result in a higher valuation
as compared to Trading Comparables. However, the case reverses in the IT sector
where Trading Comparables seem to inflate value. This is caused because, the
market at large believes that DCF fails to capture value in some sectors while
Comparables fail in others.
Note: The explanation above should be considered a Rule of thumb & not a tenet!
In short, Transaction Comparables result in

highest valuations. While, in Bull markets
Comparables result in higher valuations than
DCF. The reverse holds true in Bear markets.
Unlike what many believe, DCF does not Inflate
value or result in highest value. The so called
DCF inflation is a result of errors & unrealistic
assumptions as a consequence of oversimplification of the approach

Which method is best suited: Scenarios-wise
Start-ups
Matured Companies
IPO Valuation
Startups are driven by far too

many factors to be captured by
simplistic valuation models.
Their sensitivity to Economic,
Sector Specific and Company
specific factors must be
captured as far as possible to
reasonably value them. These
factors can only be captured
with the DCF method.
Matured Companies, have fairly

predictable financials and hence
DCF will result in a fairly reliable
valuation. However, the Dividend
Discount Model will also work
reliably, as matured companies
have nominal expansion needs
and hence a high dividend
payout ratio along with
predictability of growth rates.
E.g. Large FMCG companies
Although, for such situations it is best to use DCF as it

determines the intrinsic value, not many will want to use it as
it is likely to understate value as against Comparable valuation.
Simply because, the idea behind an IPO is to raise maximum
possible capital for a minimum dilution in equity! Hence most
IPOs come out in bull markets where valuations are already
stretched and Comparable Valuation will result in higher
values as compared to DCF, as a result of circularity involved
in such the approach. Consequently, you may notice that IPOs
are demand driven rather than intrinsic value led, as a result
many average companies get extraordinary valuations!
High Growth Companies
Cyclical Companies
Distressed Companies
High growth companies have

drastically changing market
shares and hence it is very
difficult to compare them with a
benchmark, making comparable
valuation difficult and leaving
one to go with the DCF
approach.
E.g. Telecom companies
Cyclical Companies, by virtue,

have a very high degree of
uncertainty. Secondly, such
companies are always on the
radar for news & management
comment both of which are
immediately reflected in
Comparables. On the other
hand, DCF may have to wait for
a quarter or more to reflect a
change. E.g. Sugar Companies
Distressed company valuation, is particularly tricky as the

challenge lies in finding fair value and not the lowest value!
By distressed, we mean loss making companies or those that
are restructuring their businesses by selling off toxic assets
and toning down capital structure. Traditional valuation
approaches fail miserably as a result of the uncertainty
involved and this is where Liquidation Value & Replacement
cost method come to the rescue. Liquidation Value measures
return from selling off or liquidating the assets while
Replacement Cost measures the opportunity cost of setting
up a business. E.g. Many Textile Companies

Which method is best suited: Sector-wise
Basic materials
IT & ITes
Telecom
Healthcare / Hospitality
Steel & Cement represent

basic/building materials. The
sectors are cyclical (driven by
expansion cycles). Being
cyclical, in normal/bullish
scenarios Comparables
approach is best suited.
However, in downturns it is
better to shift to Asset based
approaches to reflect
maximum downside potential.
IT & ITes companies have very

complicated business models
where revenues are scattered
& unpredictable, face constant
threat of protectionism and so
one simply cannot have a
reliable long term forecast.
Hence Comparables is chosen
over DCF by most. However,
we suggest the use of DCF in
very bullish/bearish markets.
The Telecom sector, has rich &

abundant data availability to
generate very reliable numbers
over a 3-5 year horizon and the
business model can be very
easily broken down into a flow
of numbers. For this reason it
is recommended to use the
DCF approach. However, many
analysts use Comparables to
provide short term targets.
Like telecom, these sectors

too can be very easily broken
down into a logical flow of
numbers resulting in a reliable
medium-long term forecast.
Hence DCF is a rational choice.
However, asset based
approaches are a must in
bearish markets to determine
worst case scenario valuation
Core Sectors
Retail
Conglomerates / Multi Businesses
Infrastructure, Power and Oil &

Gas together form the Core
Sector. These sectors are
primarily driven by government
policy and funding, the details
of which are clearly made
available. Having distinct
drivers along with rich data
availability make it a perfect
DCF candidate. Asset valuation
should be used as a support.
Although appearing to be
simple, this is one of the most
complicated sectors to value.
The complexity is a result of
distant breakevens, multiple
formats, complex funding
provisions (debt/lease/cash)
and not-so-easily-quantifiable
demand. This leads to a hybrid
valuation approach often called
SOTP Valuation!
SOTP valuation, is not an altogether different valuation

methodology but just a combination of two or more traditional
ones. The idea being, in case of a multi-business firm, certain
business units may be better off valued using DCF while others
may be valued using Comparables while some maybe valued with
an asset based approach. The result of each, shall be summed-up
to determine the value of the firm as a whole. Sum Of The Parts
(SOTP) can be used for multiple product lines, multiple business
units or multiple subsidiaries. The choice of valuation for each
unit must be based on strong rationale, rather than gut feeling
(as discussed for the sectors above).

Valuation FAQs: General
Why do Share Prices
Move up?
Can we Forecast
Sentiments?
What about market

expectations ?
Why do share prices move up ?

There are two broad factors affecting share prices
1. Fundamental performance of the company - Growth and quality/sustainability of Cash flows,
excess return over cost of funds (a.k.a. Economic Profit or EVA)
2. Market Sentiments Market sentiments may be influenced by overall performance of the
Economy, Institutional holding, Government policy, Sector performance, Promoter holding,
Management quality etc.
The points above can be combined to suggest that Share prices will move up only when
performance (fundamentals) is greater than expected returns (sentiments)
Or as Mckinsey calls it Running faster than the expectations Treadmill
Can we forecast sentiments ?
No. It is like asking how many people will want to buy/sell a stock at a given point. As mentioned
above there are lot of factors affecting sentiments and it is very difficult to understand how the
market will react to each such factor. Although, Technical analysts claim to do so, it is yet to be
proven and therefore it remains a controversial subject
What about market expectations ?

Unfortunately, sentiments drive expectations. At best, a snapshot of market expectations can be
taken by getting Consensus estimates (available on popular websites /databases like Bloomberg,
Thomson-Reuters etc.) However, one cannot forecast this aspect and hence beating the street
remains the biggest challenge for managers!
10

Valuation FAQs: General [Contd]
Any proof that other
methods work ?
Wealth Maximization or
Profit Maximization?
Any proof that other methods of valuation work ?

Yes. According to a study conducted by Tom Copeland (Co author of a bestseller, Former Chicago
University Professor, Former Partner at McKinsey & Co. and currently Partner - Monitor group) a
correlation of 80% between DCF and Current Market Price exists!
Wealth Maximization or Profit Maximization ?
Profits are not the only source of Financial rewards to a shareholder. She may also benefit from
capital appreciation as a result of selling her stocks at a higher price. As a result the Profit
Maximization motive fails in comparison to Wealth Maximization (includes also sources of wealth)
How does a company

create wealth?
How does a company create wealth ?

To achieve this goal the company must strive to generate a return over its cost of funds while
beating (or at least matching) market expectations ! The spread between the returns over funds
and cost of such funds is called Economic Profit.
What does Economic

Profit mean?
What does Economic Profit mean ?

A.k.a. EVA In the equation below, ROIC represents the return on capital while WACC reflects the
cost of the same. For a firm to grow and reward its Claimholders its Return on Funds must always
be higher that the cost. Economic Profit = (ROIC WACC ) x Invested Capital
So when does DCF come

into the Picture?
So When does DCF come into the picture ?

A Discounted Cash Flow Valuation aims to arrive at the Intrinsic Value of a company by
discounting the forecasted free cash flows at a rate = cost of generating such cash flows.
11

Valuation FAQs: DCF
Why Discount Cash Flows
and not Profit?
Why is it considered more

scientific?
Why not discount

dividends4 ?
Why Discount Cash Flows ?

As discussed, the goal of a company is to generate wealth for its owners (i.e. Shareholders) and not
Profit Maximization. The method is based on the belief that ultimately what can be distributed to
Shareholders is Cash and hence the phrase Cash is King.
Why is it considered more scientific ?
Shareholder wealth will be maximized as a result of cash inflow through cash/stock dividends and
capital appreciation. However, paying dividends implies that the company has lesser internal cash
to reinvest as a result it will need to borrow/raise more, causing the Share price to come down by
that much. On the other hand Capital appreciation, in the long run is related to company
fundamentals. This also explains why growing companies pay less or no dividends as compared to
stable/mature ones.
Why not discount dividends4 ?

Firstly, Not all companies pay dividends. Secondly, dividends reduce internal cash resulting in a
reduction in its Share price (Although for mature companies, as a result of lesser reinvestment
needs Dividends are believed to increase Shareholder wealth).
4 Dividend
Discount Models, although not very popular with practitioners, have their own place when the situation is right. For e.g.
they are popular with investment banks & research firms when it comes to valuing banks and companies that have high payout ratios
12

Valuation FAQs: DCF[Contd]
Will DCF give an accurate
Value per Share?
Is DCF the best method to

arrive at Fair Value?
Should we forecast cash

flows directly ?
Will DCF give an accurate value per share ?

Value per share as arrived at using DCF is just as good as the quality of Forecasts. Although there
are several approaches to scientifically forecast the performance one must remember that a
forecast, by virtue is based on certain assumptions, which are specific to every company/analyst.
Although companies often aim to standardize such assumptions, they remain just that !
Is DCF the best method to arrive at Fair Value ?
As mentioned earlier, there is no best method. Share Prices, in the long run will (and must) revert
to fundamental performance of the company in question. However, prices are also driven by
sentiments which are not captured in DCF. This is where Comparables come to the rescue, it not
only captures sentiments but is also better suited between quarterly results. Hence DCF and
comparables are said to be complimentary! The process of triangulation is hence recommended
Should we forecast cash flows directly ?
No. Cash Flows are the most important component within the DCF equation and hence the quality
of forecasts will ultimately decide the reliability of the Intrinsic Value thus arrived at.
Although Academicians suggest that cash flows must be directly forecasted, such a practice will
yield unreliable results in real world situations.
The lifeblood of a company is Sales and hence it is a very critical item while forecasting cash flows
Secondly a detailed COGS & Capex build up cannot be ignored. Put Simply, Free Cash flows are an
outcome of a detailed Financial-cum-business model. Directly forecasting them will result in little
credibility to the final output !
13

Valuation FAQs: DCF[Contd]
What is Discounting?
And why must it be used?
How is the Discount rate

calculated ?
Methods within DCF ?
What is Discounting? And why must it be used?

Discounting flows from the concept of Time Value of Money. Put simply, it means the value of
money deteriorates with time as a result of risk/uncertainty. To determine Present Value of a
future cash flow we must discount it by the cost of funds raised to generate the cash flows.
How is the discount rate calculated ?
The Estimation (not calculation) of the discount rate firstly depends on the type of DCF method
used, following which, one must estimate the opportunity cost of the capital contributors (i.e.
depending on the type of DCF method used the discount rate will vary). Following the principle of
consistency one must identify all contributors to the specific cash flow model
Methods within DCF ?
Contrary to popular belief, all 4 methods within DCF must result in the absolutely same Value per
Share. However, capital structure and beta prevent this from happening.
Therefore, it is futile to compare/use two different DCF approaches simultaneously.
1. Enterprise DCF The method aims to forecast operating cash flows for firm (i.e. available to all
capital contributors), subtract the Present Value of all Non-Equity items and add back all nonoperating excess cash/cash equivalent items. The discount rate hence must be the WACC.
2. Equity DCF Theoretically the easiest of all, but practically the method poses several challenges
and hence loses out to the Enterprise method in popularity. As the name suggests, Cash Flows
to Equity holders are calculated and hence discount factor is the Cost of Equity
3. Adjusted Present Value Recommended for use in Special situations like LBOs
14
4. Economic Profit Method Uses EVA tovalidate the Enterprise DCF approach

Valuation FAQs: Comparables
What are multiples?
How are Multiples used?
Are they more popular

than DCF ?
What are multiples ?

Multiples are ratios used to gauge the degree to which a stock is over/under valued. By themselves,
they are of no significance. However, when compared to a set of similar companies a lot may be
revealed. As mentioned earlier they are used both in Trading and Transaction comparables .
Multiples are of two main types Equity and Enterprise each having its own place
Types of Equity multiples P/E, PE/G, M/B (or P/B) etc.
Types of Enterprise Multiples EV/Sales, EV/EBITDA, EV/EBIT etc.
For Every multiple the numerator must be related to the broader market while the denominator
must be one that reflects a relationship between the company fundamentals and the appropriate
numerator. To make things simpler, lets consider the most popular of all multiples P/E. Now, the
numerator is the Market capitalization or Market Value per share i.e. the market value of equity
and hence the denominator must reflect what is available to equity claimholders Net Profit.
How are Multiples used ?
A sector average (or weighted average ) is calculated as a benchmark on a Last twelve month
(LTM) or Forward basis, to which the company in question is compared, thus determining
whether it is over/under valued. 5
Are they more popular than DCF ?
Yes. The approach, as a result of its (believed) ease of application, flexibility and reach is far
more popular than any other. However, to make it real world ready it needs some serious
research and enhancements to its popular avatar!
5 The explanation was a oversimplification of the actual process
15

Recommended Reading
Recommended Reading
Books
1. Mckinsey Valuation 4th Edition Tim Koller, Marc Goedhart & David Wessels
2. Financial Valuation James R. Hitchner (with contributions from 25+ Authors)
3. Investment Fables Aswath Damodaran
(Note: Although, Investment Fables is a very well written study, we do not recommend Damodarans valuation
approach as we believe it is far too simplistic & fundamentally naive for real world application)
Recommended Articles
1. The expectations treadmill Richard F.C. Dobbs, Tim Koller (Mckinsey Quarterly)
2. Do Fundamentals or Emotions drive the Stock Market? Tim Koller, Marc Goedhart & David Wessels (Mckinsey
Quarterly)
3. Equity Analysts: Still too bullish Marc Goedhart, Rishi Raj & Abhishek Saxena (Mckinsey Quarterly)
4. The irrational Component of your Stock price Marc Goedhart, Bin Jiang & Tim Koller (Mckinsey Quarterly)
5. New developments in valuation An interview with Tom Copeland

Contact US
Contact Us
Finatics [FFS Consulting & Training Private Ltd.]
2nd Floor Epicenter building, Nr. Caf Coffee Day,
Law College Road, Pune-411004, India
Office : +9120 41223168/7
Abhijit : +91 9766-498-350
abhijit@finaticsonline.com
Rahul :+91 9096-119-299
rahul@finaticsonline.com

Valuation Fundamentals

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Valuation Fundamentals

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Valuation Fundamentals

Which method is best suited ?

Press Alt, W, F for maximizing viewing area

Equity Valuation Fundamentals

At Finatics, we define Equity Valuation as

So what is Fair Value of an

How should the worth of an

Put Simply, Fair Value is the price at

As discussed, investment related

the other way is to find out what

Equity Valuation Fundamentals

Valuation is used at two levels

Buy Side Institutions

Sell Side Institutions

Buy Side refers to those institutions

Sell side are involved with

Corporate Finance refers to managing

Equity Valuation Fundamentals

What is Wealth Maximization?

Note: Today, many companies believe that Value Creation for

Business decisions must be

the total wealth created for shareholders through capital

Equity Valuation Fundamentals

Why not have just one approach?

Income based approaches aim to discover

Market based approaches aim to capture

Asset based approaches aim to value a

Equity Valuation Fundamentals

Discounted Cash Flows

DCF Valuation aims to discover

a.k.a. Relative Valuation, aims

Although not an entirely

Other methods some of which

Best Suited For: The long

Best Suited For: Highly volatile

Remark: These are the most

Remark: Modern theory &

Equity Valuation Fundamentals

Investment Horizon & Valuation

Investment Type & Valuation

No. There is no Best

Investment Horizon i.e. Short Term or Long term

The best way out

Market Conditions & Valuation

The best approach is what

Bullish & Bearish Markets call for different valuation strategies

Equity Valuation Fundamentals

Public Company Valuation

Private Company Valuation

Public Companies, by law, must provide audited financial results

It must be noted that , Private company valuation is driven by a

Which valuation method results in the highest Valuation?

In short, Transaction Comparables result in

Equity Valuation Fundamentals

Startups are driven by far too

Matured Companies, have fairly

Although, for such situations it is best to use DCF as it

High Growth Companies

High growth companies have

Cyclical Companies, by virtue,

Distressed company valuation, is particularly tricky as the

Equity Valuation Fundamentals

Steel & Cement represent

IT & ITes companies have very