Target valuation multiples that are implied by key value drivers are a great way to better understand equity valuation and how the characteristics of a company affect value. The approach incorporates the same links with underlying value drivers on which DCF is based, but in a simplified way that is more intuitive than a full DCF model. Our target multiple model can be used to estimate a deserved valuation multiple for a company, sector or index, to reverse engineer returns or growth implied b...| The Footnotes Analyst
One of the errors we encounter when reviewing DCF models concerns valuation date and cashflow timing adjustments. Although the effect may not always be that material, getting these adjustments wrong undermines the credibility of DCF valuations. We explain the correct application of valuation date adjustments, the necessary amounts for the enterprise to equity bridge, and how to roll-forward values to derive 12-month price targets. We also provide a downloadable model to illustrate these diffe...| The Footnotes Analyst
The inconsistent and incomplete recognition of intangible assets in financial statements distorts performance metrics. Invested capital and profit are understated - to what extent depends on the business dynamics and nature and source of investment in intangibles. The combined effect is generally to overstate return on capital. With the ever-increasing importance of intangible assets, few companies are unaffected by this accounting problem. We suggest adjustments to help your analysis, provid...| The Footnotes Analyst
If DCF terminal values are based on continuing forecast cash flow, it is important that the reinvestment assumption is consistent with long-term return expectations. We provide an interactive DCF model that demonstrates four alternative cash flow growth-based terminal value calculations, along with related returns analysis. One of the challenges when using returns in equity valuation is the limited recognition of intangible assets. Adjustments to capitalise intangible investment do not change...| The Footnotes Analyst
There is usually at least one metric that gives valuation-based support for an investment, even if this is contradicted by other indicators of relative or absolute value. You may have heard comments such as “… but it looks cheap on EV/EBITDA” to help justify a particular investment recommendation. We examine why different multiples can give conflicting indications of relative value. For example, food-on-the-go stock Greggs trades at a 35% discount to rival Dominos Pizza, based on EV/EBI...| The Footnotes Analyst
