The Purpose of Valuation

You value a Company to determiniert its Implied Value according to your views. If this implied value is very different from the company’s current value, then you can invest in the company to make money when the value changes

Market Caps and Share Prices reflect its current value according to the market, but the market might be wrong! So you value the companies to see if the market’s views are correct.

1. Public comps:

   • Advantages:

     • based on real market data

     • quick to calculate and explain

     • do not depend on far-in-the-future assumptions

   • Disadvantages:

     • There may not be truly comparable firms

     • Analysis will be less accurate for volatile or thinly traded companies

     • May undervalue companies’ long-term potential

• Advantages:

  • based on real prices that the companies have paid for other companies, so it may better reflect the industry trends than public comps

• Disadvantage:

  • There may not be truly comparable transactions, specific deal terms and market conditions might distort the multiples

  • the data could be spotty(质量不一的，有好有坏的） and misleading

• Advantages:

  • Less subject to market fluctuations, better reflects company-specific factors and Long-Term Trends

• Disadvantages:

  • Dependent on fair-in-the-Future assumptions,

  • Disagreement over the proper calculations for key figures like Cost of Equity and WACC

1. A DCF tends to produce the most variable output since it’s dependent on the assumptions made.

2. Precedent Transactions tend to produce higher values than the public comps because of control premium.

1. When the company is mature and has stable, predictable CF

2. When you lack good public comps and precedent transactions

Notice that you should always build a DCF since it is valuation and the other methodologies are supplemental

To generalize this problem. Normally the healthcare company will be worth more

1. Healthcare is a less asset-intensive industry. That means the company’s CapEx and Working Capital requirements will be lower, and its FCF will be higher (closer to EBITDA)

2. Healthcare tends to be more of a “growth industry” than industrials. Although the discount rate might be higher , the higher expected growth rates and lower asset intensity would make up for that

No, not exactly.

1. The DCF method depends less on the market than the other methodologies, but there is still some dependency

   1) The Discount Rate used in the DCF is usually linked to peer companies (market data), and

   2) If you use the Multiples Method to calculate Terminal Value, the multiples are also linked to peer companies.