The document discusses valuation and analysis of businesses and companies. It covers topics such as valuing buildings, businesses, and stocks based on factors like required rates of return, earnings, and price-earnings ratios. It also discusses analyzing companies by understanding their products, markets, value chains, financial statements, and ratios to evaluate solvency, operational efficiency, and efficient use of capital. The document is intended to provide guidance on valuation and analysis for purposes like investment decisions.

1. Stockmarket.
Valuation and
Analysis
Alexander Gilles, CFA

2. Part 1
Valuation and Discount Factors

3. Concerned about valuation
Board
Management
Marketing Production
OperationsBuyers Suppliers
Finance
Equity Analyst Credit analyst
Strategist Rating agency
Stockholders Lenders
Equity funds, VC
funds, raiders
Potential
stockholders
Potential
lenders
Bond funds, high-
yield (junk) bonds
Financial
statements
Investmen
t bankers

4. 4
Value of a building
Dividends on a building = rent payments
ex. IF Rent: 2million, and required return is
25%, then 2 million / .25 = …………
If required return is 0.15: 2 / 0.15 = …..
If required return is 0.08: 2 / 0.15 = …..
Observation:
………………………………………
ex. Rent of 1 bn, required 12%, value of
the building is: ……………………

5. 5
Value of a business
Stable business, generates P20m a year
Earnings / “r” = Value. PER
20 / .15 = 133m 1/.15 = 6.6x
20 / .20 = 100m 1/.20 = 5.0x
20 / .30 = 66m 1/.30 = 3.3x
PER multiple = 1/ required return
Value of 133/earnings of 20 = 6.6x
Earnings of 20/Value of 133 = 15%

6. 6
Value of a business
Stock PeR multiple= Price /
Earnings
Earnings x multiple = value.
 Definitions:
• Net income x multiple = value
• Sales x multiple = value
• Cash flow x multiple = value
This business earns 30,000 a year. Other businesses
of this same type are valued at a multiple of 15x. This
business must be worth P…………
This business earns 4 million a year. Other businesses
of this same type are valued at a multiple of 12x. This
business must be worth P…………

7. 7
Value of a business
Earnings
300,000 a year Take the same earnings of 300,000
at 15x = 4.5m discounted using 0.066667 =…….
at 12x = 3.6m discounted using 0.08333 =…….
at 8x = 2.4m discounted using 0.125 =…….

8. Part 2
Company analysis

9. Understanding a Company
• How elastic is the demand for the company’s products/services?
• Is the demand seasonal?
• What is the raw material situation?
• What are the key products for the company and what is their contribution?
• How is the company competitively placed in that product segment?
• Which geographies are key revenue contributors to the company revenues?
• How competitively poised is the company in that geography?
• How risk free is the geography?
• Which product contributes maximum to the company’s profits
• Which geographies contribute the maximum to the company’s profits
• Does the company have a unique selling proposition (USP)?
• How strong/sustainable is the company’s USP?
• Does the company enjoy an important position in the market (like largest player etc)?
Business
Product
Segments
Geographic
Segment
Key Profit
Contributors
USP

10. Raw Material 1
Raw Material 2
Raw Material 3
Manufacturer
(Production Processes)
Distributor/Wholesaler
Retailer
Allied Components
Allied Services like
Transportation;
security etc
Exclusive Showrooms
Intermediaries in Raw
Material Procurement
Value Chain Analysis • Quality of Components
• Cost of components
• Speed of Delivery
• Time for scaling up• Factory location (near RM or
customer)
• Production time/rate
• Error Rate/Quality
• Ability to scale up
• Wastages
• Transportation Time
• Efficiency of routing and
scheduling
• Cost-Benefit of having
exclusive show rooms
• Benefit of additional visibility
through showrooms
• Margins/incentives to dealers
• Timely distribution (wh salers)
• Competition from local products
• Retail level promotions
• Cost of Raw Mat
• Procurement time
• Adequacy of supply
• Long term supply
contracts
• Cost of Transport

11. 11
Value chain’s
impact
Cost of Raw
materials
Warehousing
Trucking
Cost of
Goods
Sales
Other
income
Workers
salaries
Selling Gen
Admin
expenses
Tax savings
Lower
Interest
expenses
Making money or saving money, from manufacturing process or
from any other process.
Value

12. 12
Interpreting News Items/Developments
• What will be the impact of the news/development on the company’s business?
• Is the news/development a positive or a negative aspect about the company?
• Why will a particular development/news affect the business of the company?
• In case of a threat, can the company escape it?
• How profound will be the impact of a news/development on the company’s
business
What?
Why?
How Much?

13. Part 3
Financial statement analysis

14. Growth in Prices
Growth in Volumes
REVENUEGROWTH
Volume Growth Because of:
• Better marketing/brand promotion by the company
• Improved/enhanced distribution by the co.
• Expansion into new region/product/variant
• Take over of a competitor
• Industry wide demand increase
• One time increase because of a special order
Is the Price Growth Sustainable
• Price increase is industry wide/individual initiative?
• How elastic is the demand for the product?
• What is the competition scenario (fragmented?)
• Does the industry operate on a premium concept?
• Is there scope for another price increase?
Decline in Prices
Decline in Volumes
REVENUEDECLINE
Volume Decline Because of:
• Better brand promotion by competitors
• Obsolete/outdated technology; quality issues
• Problems in supply chain management
• Failing relationships with workers/distributors
Reasons for Price Decline:
• Competition induced price decline. not always sustainable)
• Product un-sellable (forced to reduce price)
• Regulatory price fixing (my force out small players)
• More efficient production (should reflect positively in volumes)
• Favorable tax policy (should reflect positively in volumes)
Analysing Revenue Changes: Growth/Decline in Revenues

15. Cost of Goods Sold
(COGS)
Selling, General &
Admin Expenses (Includes
Marketing Expenses)
Salaries & Wages
Interest
Income/Expenses
COGS Increase :
• Increase in RM prices (is this rise more than revenue increase?)
• Increase in production/take over of new company (should reflect positively in revenues)
COGS Decline:
• COGS decline – More efficient raw material procurement/ use of alternative RM
• COGS decline – More cost efficient production process
SG&A Increase:
• Intensive Marketing and Promotion Campaign (should reflect in revenues)
• Acquisition/expansion activity going on (check whether earlier acquisitions were compatible)
• Company caught in litigations/legal activity (this cost is also categorized as Professional Exp)
Increase in Salaries and Wages:
• Increase in average wage rate (check whether this is a because company is doing good?)
• Additional hiring in marketing/production/legal departments (does it reflect in co performance)
• Payment of performance oriented bonus/ bonus for employee retention (is labor mkt
stressed)
Interest Expense Increase:
• Additional debt taken by the company (check how company expects to use this debt)
• Earlier default by company, new interest is penal interest
• New liabilities taken over due to new acquisitions (check whether acquisition was profitable,
i.e assets greater than liabilities)
• If new acquisition not profitable, did company get a government aid for acquisition
Analysing Cost Changes
Note: Also check reasons for increase in depreciation & amortisation; unusual expenses and use of deferred tax asset/liability

16. 16
Understanding the Balance Sheet
A balance sheet indicates all sources of funds for a company and where it
applies those funds
Liabilities reflect the various ways in which a company has raised short term
and long term funds
Assets are where such funds are utilised
All sources of funds come at a cost.
All application of funds should come at a profit
A balance sheet analysis involves analysing efficiency of use of funds,
measuring solvency (asset-liability matching) and operational efficiency

17. 17
Analysing a Balance Sheet
Analysis of solvency of the company
 Current Ratio
 Quick Ratio
 Gearing Ratio (Long term Liabilities/Net Worth)
 Working Capital should be positive (current assets - current liabilities)
 Long term assets should be backed by long term liabilities only
• Analysis of Operational Efficiency
 Inventory Days of Handling
 A/c Receivables Days of Handling
 A/c Payables Days of Handling
 Working Capital Turnover (Sales/Working capital *100)
Analysis of Efficiency in use of capital/assets
 Return on Equity
 Return on Capital Employed
 Return on Assets
Compare Ratios
with Peers to get
Industry view

18. 18
Ratios: what they mean for business
Solvency Ratios
Ratio for measuring
operational efficiency
Ratio’s for measuring
efficient use of
capital/assets
• An adverse short term solvency ratio (current ratio/quick ratio) indicates a short term liquidity
crunch
• A high gearing ratio means that much more interest expenses
• A high gearing ratio may also make it difficult for the company to raise new debt
• Long term assets backed by short term liabilities (current liabilities) is a potential liquidity
problem
• High inventory days of handling (especially as compared to peers) may indicate problems
with inventory management.
• This ratio say that either demand is low for products or company is producing more than
needed. Both will affect profits
• High A/c receivables days of handling means receivables are not quickly converted to cash.
Hence operating cash flow will not grow in sync with profits
• Low a/c payable days of handling means credit period from suppliers is very low. This will
reflect into greater requirement of working capital, hence more short term loans
• Adverse ratio (in comparison to competitors) means company is not utilizing its
capital/assets as well as its competitors
• Adverse ratio could reflect problems with low revenues or high costs. High costs may also
reflect in to problems with pricing of products
Also Check:
• Maintenance CAPEX: Is maintenance CAPEX as a percentage of revenues going up. Check why and is that rational
• Expansion CAPEX: Expansion capex drains out cash reserves. Check whether expenditure will help company
• Additional Debt: Additional Debt means more interest costs. Check how company expects to use new debt.
• Debt substitution: debt substitution means taking low cost debt to pay off high cost debt. This is a positive sign