From the book, it appears that there are about 40 different models and methods for valuation of companies and shares. Typically, they fall into three main types, of which two is illustrated in the table, while the third consists of real option models, which are based on the theoretical statistic’s probability models.
| The absolute models encompass for example the following: |
The relative methods encompass for example the following: |
| DCF-models |
P/E-method |
| EVA- and Dividend models |
EV/EBITDA method and EV/EBIT method |
| Substance value model |
P/IV-method |
| and are characterised by the fact that they perform the valuation on the basis of the company’s own absolute internal and forward-pointing strategy factors taking into account its external strategy factors. |
and are characterised by the fact that they perform the valuation relatively to one or several comparable listed or unlisted companies using multiples from these. |
When CDI Global calculates market values of companies’ equity capital, we apply only the absolute valuation models. This is because most professional investors, stock market analysts and Corporate Finance experts worldwide agree that the economic principles, theories and ideas that lie behind the models are those that fundamentally and on the long term generate stock prices on all stock exchanges over the world.
Therefore, the models are also considered to be able to calculate the most accurate theoretical and practical market values that are as close as possible to the market values that would appear if the company were listed. Additionally, the basic principles and theories behind the models are the same as in the models used to calculate bond prices and internal rate of interests on all the world’s bond exchanges.
CDI’s DCF, EVA and DIVIDEND valuation models are illustrated in the figure below.
The models are applied the way that the company’s realistically expected future profit and loss accounts and balance sheets are budgeted. This is done by means of the approximately 50 direct economic value drivers per year, mentioned in “EVA Specifically”. In order to ensure realistic figures, the applied value drivers are subjected to an in-depth strategic analysis and additionally the valuation and its assumptions becomes 100% transparent to both buyer and seller.
The correctly interconnected accounted P&L and balance sheet budgets are then compared and analyzed with the corresponding historically realised figures in order to for example assess whether there is a realistic consistency and trend between the historically realised figures and the future forecasted figures.
Subsequently, the expected accounting figures are transformed in to cash figures in the form of Free Cash Flows, Dividends and EVA amounts. This is due to the widespread recognition worldwide that “Cash is a fact, whereas profit is an opinion”.
The long term future realistically expected cash figures are then discounted to present values. The discounting factor is the WACC or the required equity capital yield mentioned under “Value Creation”. As clarified earlier, they reflect the stock market’s current required minimum yield and contain both the stock market’s current risk premiums as well as the risk premiums specific for the company.
When the calculated present values are adjusted for different conditions, the market value of the company’s equity capital appears.
The realism of the market value is subsequently “pressure tested” by means of strategic analytically supported simulations, scenario analyses and stress tests as well as by taking into account possible synergies and valuations applying other models.
In the book there is also shown a wide range of valuations with the well-known multiple methods, of which the most commonly used are shown in the following table, and where all the methods are applied as in the top “calculation template” found in the table.
However, through tangible examples it is shown that for more than 30 different reasons, these methods are more rough “thumb calculations” than actual valuation methods. They
cannot express anything about value creation and they cannot be applied for value optimisations.
It is also shown that they often give completely random valuations that may vary several hundred percent compared to the equity capital market value, which reflects the company’s fundamental long-term earning capacity and cash flow generation.
Therefore, it is recommended in the book that they never alone – neither by seller nor buyer – should be applied for valuations.
