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.