Valuation is not just about numbers flashing across financial dashboards, but a story that follows strategy, economics, finance, financial standards, industry analysis, statistics, market research, and consumer behavior.
So let's start the journey of the known and unknown about valuation, but first things first. Lets, go through the steps in valuation. This is divided into four sections: Market, Strategy, Forecasting and Finance and then connect each section to understand the Valuation numbers
Market Connect
Step 1: Characterize the company into an industry to which valuing company belongs
Step 2: Understanding the industry characteristics - Porter Five forces
Step 3: List and understand the business units into which the company that we value is divided
Steps 4: Understand the consumer behavior from the market demand side for each business unit
Step 5: List and analyze competitors in each business unit from the perspective of product and services, pricing, supply channels, promotion activities - The Marketing Mix
Step 6: Create value and perception maps for each business unit
Strategy Connect
Step 1: At the corporate level, what strategy is the company following
Step 2: At Business Level, what strategy is the company following and understand the elements of value it is propagating
Step 3: Conduct Porter 5 forces analysis to understand the profitability of the company
Step 4: Conduct competitor analysis to understand the competitive rivalry to understand the impact on revenues, costs and profitability
Forecasting Connect
Step 1: Forecast key financial parameters using regression or time series forecasting
Step 2: Input forecasting output to forecast key financial parameters
Finance Connect
Step 1: Create basic layout of the valuation model
Step 2: Input Historical data in the model - P&L, Balance Sheet, Cash flow statement and Schedules and notes
Step 3: Understanding the accounting standards company follows to create financial numbers
Step 4: Create Assumption sheet for forecasting financial statements and schedules
Step 5: Input and Understand notes to accounts related to income statement, balance sheet, and cash flow statement to re-organize these statements
Step 6: Re-organize income statement, balance sheet, and cash flow statement to estimate Net Profit After Tax (NOPAT) and Balance Sheet used for Discounted Cash Flows (DCF) calculation
Step 7: Prepare Schedules to Accounts required to complete projected income statement, balance sheet and cash flow statement
Step 8: Calculate Weighted Average Cost of Capital to discount Cash Flows
Step 9: Estimate company value using Precedent Transactions and Comparable Trading Metrics
Step 10: Collate Equity Research Analyst value estimates for the company
Step 11: Determine value of a company using DCF methodology
Step 12: Compare Valuation of company using different methods
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