Questions to ask about a Company's Valuation (Continued)

[Source: F. Mitchell's Accounting Course, UEBS 2011]

(1) Check for "Healthy" growth.
 (a) Are profit margin's shrinking?
 (b) Is asset investment growing?
 (c) How is credit control?
 (d) What is the cash position? (symptoms of overtrading?)
 (e) Is Growth converted into Cash?

(2) Check Liquidity
 (a) Check the Current and Quick Ratios

(3) Check Gearing
 (a) What is the firm's interest cost?
 (b) Check Interest Cover (TIE -> Times Interest Earned)

Questions to ask about a Company's Valuation

[Source: F. Mitchell's Accounting Course, UEBS 2011]

(1) What is the company's business model. (How does it make money?) Will the company see changes in performance in coming years?
 (a) Industry stable? What are peer P/E Ratios?
 (b) Strength of Corporate or Government competition?

(2) Will the company restructure its operations? If so, how?

(3) What is the P/E ratio of similar companies in the same industry?

(4) What is the Book Value? -> Look at the B/S
 (a) Equity/Numbered of Issued Shares
 (b) Equity to be calculated by adding R/E + Share Capital.

(5) What is the Adjusted Book Value? -> Add Property and Inventory revaluation based on Market Value.
 (a) Add the difference between the Market Value and B/S (Book) Value to Equity.
 (b) Divide by the number of shares.

(6) What is the Value based on future expected Income?
 (a) Accounting Rate of Return Method: Expected Future Annual Profit / Required Return on Equity
 (b) Adjust Profit after tax for exceptional items. Use weighing factors to make recent earnings more relevant.
 (c) Valuation will be, in essence, a perpetuity calculation.
 (d) Dividing this Value by the number of outstanding shares provides a share price.

(7) Super-Profits Method
 (a) Calculate the Fair Value of Net Assets
 (b) Multiply by an acceptable return (12%)
 (c) Subtract this acceptable return from Expected Future Profit to obtain "Super Profits"
 (d) Add 5 years of "Super Profits" to the Fair Value of Net Assets (from a)
 (e) Dividing this Value by the number of outstanding shares provides a share price.

(8) P/E ratio
 (a) Determine an appropriate P/E ratio by examining industry average and key peers
 (b) Multiply the P/E ratio by Earnings and divide by outstanding shares to get the share price.
 (c) Synergies can be added by considering profit improvement by consolidating or merging business units or joining 2 businesses. Other one-time value adders can be added to the P/E*Earnings figure.