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Sri Lanka Equity Forum » Stock Market Charts & Graphs » The Basics Of Valuing Companies

The Basics Of Valuing Companies

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1 The Basics Of Valuing Companies on Wed Sep 14, 2011 3:31 pm

sriranga

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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
Comparison Table.xlsx
You don't have permission to download attachments.
(10 Kb) Downloaded 115 times

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

2 Re: The Basics Of Valuing Companies on Sat Oct 22, 2011 9:45 pm

amilaela

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Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
ela

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

3 Re: The Basics Of Valuing Companies on 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

4 Re: The Basics Of Valuing Companies on Sun Jan 01, 2012 5:13 pm

bakapandithaya

avatar
Vice President - Equity Analytics
Vice President - Equity Analytics
Thnkx sri 4 sharing

5 Re: The Basics Of Valuing Companies on Sun Jan 01, 2012 9:16 pm

ISURU

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Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Good one! thanks

6 Re: The Basics Of Valuing Companies on Sat Mar 10, 2012 11:37 am

rmark

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Manager - Equity Analytics
Manager - Equity Analytics
Sriranga, valuable information, thank you for sharing.

7 Re: The Basics Of Valuing Companies on Sat Mar 10, 2012 1:13 pm

LateTackle

avatar
Senior Equity Analytic
Senior Equity Analytic
Very useful. Thanks for sharing

8 Re: The Basics Of Valuing Companies on Sat Mar 10, 2012 1:17 pm

trasantha


Senior Equity Analytic
Senior Equity Analytic
Tks Smile

9 Re: The Basics Of Valuing Companies on Sat Mar 10, 2012 3:08 pm

suny j


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

10 Re: The Basics Of Valuing Companies on Mon Mar 12, 2012 9:21 am

yellow knife


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Thanx

11 Re: The Basics Of Valuing Companies on Sun May 05, 2013 6:13 pm

KDDND

avatar
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Thx Sri! reading this gives more knowledge!
Bit of home work to do! Smile

12 Re: The Basics Of Valuing Companies on Fri Nov 28, 2014 1:26 pm

zoozzoo


Manager - Equity Analytics
Manager - Equity Analytics
valuable post...

13 Re: The Basics Of Valuing Companies on 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

14 Re: The Basics Of Valuing Companies on Fri Aug 26, 2016 1:39 pm

Bullrunner7

avatar
Manager - Equity Analytics
Manager - Equity Analytics
Good read !

15 Re: The Basics Of Valuing Companies on 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

16 Re: The Basics Of Valuing Companies on Tue Aug 30, 2016 12:01 am

EquityChamp

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

17 Re: The Basics Of Valuing Companies on Tue Aug 30, 2016 12:02 am

Bullrunner7

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Manager - Equity Analytics
Manager - Equity Analytics
Yes I agree !

18 Re: The Basics Of Valuing Companies on Tue Aug 30, 2016 12:03 am

EquityChamp

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

19 Re: The Basics Of Valuing Companies on Tue Aug 30, 2016 12:04 am

Bullrunner7

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Manager - Equity Analytics
Manager - Equity Analytics
I'm doing good ! 
How are you EC ?

20 Re: The Basics Of Valuing Companies on Tue Aug 30, 2016 12:09 am

EquityChamp

avatar
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..

21 Re: The Basics Of Valuing Companies on Tue Aug 30, 2016 12:16 am

Mubin Mustafa


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
good article

22 Re: The Basics Of Valuing Companies on Tue Aug 30, 2016 12:17 am

Bullrunner7

avatar
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 !

23 Re: The Basics Of Valuing Companies on Mon Dec 05, 2016 10:00 pm

jehovah

avatar
Equity Analytic
Equity Analytic
thanks...... lol!

24 Re: The Basics Of Valuing Companies on Tue Dec 06, 2016 12:40 am

ayesh84

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

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