Monday, November 30, 2009

Quick tip for valuing a company

If you're all like "How much is this company worth and stuff?" here are six steps you should take:

1. Gather data from income statements, balance sheets and cash-flow statements. The last five years of statements should do. You'll want lots of stuff, like sales; cost of goods sold (COGS); selling, general and administrative (SGA) expenses, depreciation, capital expenditures (capex), accounts receivable, inventory, and some other things.

2. Restate all those numbers as percentages of sales.

3. Make projections using those percentages and forecast the future free cash flows, applying a reasonable growth rate to sales.

4. Calculate historical free cash flows for comparison.

5. Determine a discount rate (WACC, or the weighted average cost of capital) using book values for debt, market values for equity, the company's Beta and some other stuff.

6. Do final value calculations by discounting the five years of cash flows and calculating a terminal value at the end of the five years and discounting it back to the present day. Then find a reasonable growth rate by solving for which growth rate brings the computed equity value close to the actual equity value; then evaluate whether that growth rate seems reasonable.

Good luck, and let me know how it goes. Meanwhile, here's a terrible video:


  1. I CANNOT believe you posted this. He was so cute in a goofy way. Way hotter than he is now, looking all Howie Mandel.

  2. I think he was the 90s equivalent of Ashton Kutcher (if Ashton made hideously awful and amazing music videos!)